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TMI Blog2022 (11) TMI 990X X X X Extracts X X X X X X X X Extracts X X X X ..... facts are that the assessee is a State owned undertaking engaged in trading and retail vending in liquor. The original assessment was completed u/s.143(3) of the Act, after scrutinizing the accounts of the assessee by the AO vide order dated 30.12.2016. Subsequently, the PCIT, Chennai on perusal of records noted that the assessee has claimed VAT expenses of Rs.11,491.97 crores in the profit & loss account during the previous year 2013-14 relevant to this assessment year 2014-15 and this being unusual VAT expenditure needs to be examined. The PCIT examined the provisions of section 40 of the Act and noted that this provision specified the amounts which shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession". According to PCIT, statutory duties like income-tax, wealth tax, etc., are non-deductible expenditure and disputes have arisen in respect of some of State Government undertakings as to whether any sum paid by way of privilege fee, license fee, royalty etc., levied or charged by the state government exclusively on its undertaking are deductible or not. The PCIT also observed that in some cases, orders have been issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... List I, Seventh Schedule, Constitution of India and the Petitioner pays the Stale Govenment VAT as per Section 3(5) of the TNVATAct, 2006 read with the rate mentioned in Second Schedule to the TNVAT Act, 2006 and claims it as an expenditure u/s.37 1961 in its Income Tax return which has been r.w.s.43B of the Income Tax Act, 1961 disallowed by the Assessing Officer for A Y 2017-18 u/s. 40(a)(ib) of the Income Tax Act, 1961. 11.3 It is submitted that under the Constitution of India, the list of areas which fall within the exclusive power of States are given in the List II of the Seventh Schedule. State has the exclusive power to levy taxes on sale and purchase of intoxicating liquor (Entry 54). But the power to levy fees in respect of matters in the List is given under a different entry (Entry No 66). Thus, the State derives power to levy sales tax (VAT) on liquor under entry 54 and power to levy fees in connection with production, manufacture, transportation etc. is derived under entry no 69 of the List II of VII schedule the Constitution of India. So, the power of State Government to levy tax on sale and purchase of Liquor and power to levy fees are two different powers and are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the definition of "fee/charge" is very clearly distinguished from "tax" in the following decisions: i) COMMISSIONER, HINDU RELIGIOUS ENDOWMENTS, MADRAS vs. SRI LAKSHMINDRATHIRTHA SWAMIAR OF SRI SHIRUR MUTT 1954 AIR 282 ("Shirur Mutt" case), ii) The Hingir-Rampur Coal Co.Ltd. Vs The State Of Orissa And Others 1961 SCR (2) 537, iii) Har Shankar v. Deputy Excise and Taxation Commissioner AIR 1975 SC 1121, iv) Om Parlkash Agarwal v Giri Raj Kishori & Others (164 ITR 376, 1986 AIR 726) v) Srikakollu Subba Rao & Co. & Ors. vs. UOI & Ors. (1988) 173 ITR 708 (AP), vi) CIT VS. M.L Agro Products Pvt. Ltd. (1992) 197 1TR 485 (AP), vii) CIT Vs. Dineshkumar Gordhanlal (1997) 2261TR 826 (MP) 11.8 In the Shirur Mutt case (supra) the Hon'ble Apex Court pointed out: "though levying of less is only a particular form of the exercise of taxing power of the Slate, Our Constitution has placed fees under a separate category for the purpose of Legislation and at the end of each one of three legislative lists, it has given a power to the particular Legislature to legislate on the imposition of fees in respect of every one of the item dealt with in the list itself. Again, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cise duty, in the following words: "Since rights in regard to intoxicants belong to the State, it is open to the Government to part with those rights for a consideration. By Article 298 of the Constitution, the executive power of the State extends to the carrying on of any trade or business and to the, making of contracts for any purpose. Again, it has been observed in that decision "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, tax is a compulsory exaction of money by public authority for public purposes enforceable by law and is not a payment for services rendered". (1) A fee is a charge for special services rendered to individuals by some government tat agency and such a charge has an element in it of a quid pro quo. (2). Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country (3). The amounts, charged to the licensees in the instant case are, evidently, neither nature of tax nor excise duty. But then, the License fee' which the State government charged to the licensees throug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enerally upon the capacity of the taxpayer to pay. As regards fees, Mukherjea J. observed in the above decision thus (at p. 295 of AIR): "Coming now to fees; a reel is generally defined to be a charge for a special service rendered to individuals by some governmental agency. The amount of fee levied is supposed to be based on the expenses incurred by the government in rendering the service, though in many cases the costs are arbitrarily assessed. Ordinarily, the fees are uniform and no account is taken of the varying abilities of different recipients to pay. These are undoubtedly some of the general characteristics, but as there may be various kinds of fees, it is not possible to formulate a definition that would be applicable to all cases ......If, as we hold, a fee is regarded as a sort of rectum or consideration for services rendered, it is absolutely necessary that the levy of fees should on the face of the legislative provision, be correlated to the expenses incurred by government in rendering the services. 11.12 It is submitted that Sec 43B of the Income Tax, 1961, when it was introduced contained only the phrase "Tax and Duty", Courts in the context of disallowance ix] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nadu Panchayats Act, 1958, were said to be included in the meaning of land revenue. In that case, it was not in dispute that the cess which the Madras Village Panchayat Act proposes to levy was nothing but an "additional tax" and originally it was levied only on land revenue, and that apparently land revenue would fall within the scope of Entry 49 of List II in Schedule VII to the Constitution. The Supreme Court however held that it could not be doubted that royalty which was a levy or tax on the extracted mineral was not a tax or levy on land alone and that if cess was charged on the royally, it could not be said to be a levy or tax on land and therefore, it could not be upheld a imposed in exercise of jurisdiction under Entry 49 List II by the State Legislature. The Court held that the legislature went beyond its jurisdiction under Entry 49 List H and therefore the levy was clearly without the authority of law 22. These observations whereby there is some indication that cess has been equated with tax have been sought to be relied upon by Mr Sabharwal. However, we reiterate that the Supreme Court was not exactly concerned with the question of whether a cess was a tax or not, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e never intended to disallow Taxes under sec 40(a)(iib) of the Act. 11.16 It is impossible to comprehend that when the Legislature proposes to disallow taxes that the State Government has levied under its exclusive domain, such tax is not specifically mentioned in the Section but allowed to be derived from the phrase "charges by whatever name called" 'particularly when the Apex Court has clearly laid down the distinction between Taxes and fees and have held that Taxes cannot be levied under the guise of fees. 11.17 Further, TASMAC cannot collect Privilege Fees /Vend fees separately from the Purchasers. Value Added Tax is collected' from the Customers. It is collected on behalf of the Government and passed on to the Government in totality. A trader can collect Value Added Tax as per the provisions of the Act- nothing more. The entire amount so collected is passed on to the Government. In this manner also, Value Added Tax, which is separately collected from the Purchaser, is different and distinct from the charges mentioned in S.40(a)(iib) which are borne by the TASMAC and cannot be collected from the Purchaser. 11.18 Recently, the Hon'ble Kerala High Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers and remitted to Government on monthly basis after filing necessary monthly return as per the provisions of the Tamilnadu Value Added Tax Act, 2006 and rules framed there under, it is further submitted that Annual audited VAT return is also filed as per the provisions of the Tamilnadu Value Added Tax Act, 2006 and rules framed there under. 12.3 It is submitted that Value Added Tax (VAT) is imposed on the sales or purchases made by any Assessee. VAT does not confer any special or specific benefit to the Assessee who pays the VAT. Nor can the Payer of VAT demand any specific privileges from the State Government on account of payment of VAT and Surcharge. 12.4 It is submitted that VAT is transaction specific and anybody who transacts the transactions contemplated under the VAT Act has to pay the VAT. The Payer has no option and the payment is on the value of sales and not for services rendered nor privileges granted by the State Government. The Tax is on the sale price effected by the registered dealer. 12.5 The Tax is collected at the rates specified in the VAT Act and passed on to the State Government. The Assessee/TASMAC cannot collect at a rate higher than that specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ays has been a deduction while arriving at the net profits. Such deductible expenditure cannot be considered as an appropriation/ application of income. Further it is a on profits and is based on the type of transaction and not a particular Assessee. For example, the levy is on the different types of License holders, without reference to whom or how many persons, may have been granted that type of License. Individual holders of the license may vary, but the levy is constant for all such License holders. Such a common levy on sale of goods applicable to all sellers cannot be considered as an appropriation in the case of Assessee alone. 13.5 When Value Added Tax is considered and allowed as a charge (deduction) against Sales consideration in all other cases of sellers dealing in Indian Made foreign liquor, the same cannot be considered as an appropriation in the case of State Government Undertakings /TASMAC. Character of Tax, which is applicable to all sellers as a deduction against sale consideration, does not change to one seller alone and become an appropriation. 14. Thus, on the facts and circumstances as well as the settled legal principles, it is clear that the legislature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for the impugned period 2016-17 have been audited and certified by the Statutory auditors appointed by the C&AG and Supplementary Audit has been conducted by the C&AG for which they have issued a certificate agreeing with the accounts and have passed NIL comments. Finally, in rebuttal to point no. 3 of your Show Cause Notice, we humbly submit that alcoholic liquors for human consumption is falling under the State list as per the Constitution of India. The enactment of TNVAT Act, 2006 was made as per the delegated powers to State Government. Hence, the claim of VAT being arbitrary and abnormal goes against the very powers enshrined in the State as per the Constitution. We further humbly submit there is no criteria or basis brought out in the SCN to measure the reasonableness and normality. In brief it is not levied on TASMAC but on the consumers as per the powers granted by the Constitution of India to Government of Tamilnadu through the enactment of the TNVAT Act, 2006. TASMAC collects tax while selling liquor and pay to Government. All the facts regarding VAT and payment of the same have been furnished before the Assessing Officer and that has not been doubted by your good s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of the Apex Court and Kerala High Court have In favour of the Assessee), and the Assessing Officer has taken one possible view, the provisions of sec 263 will not apply as held by the Hon 'hie Supreme Court & numerous High Courts : Malabar Industrial Co Ltd v CIT 243 ITR 83 SC CIT Vs Mepco Industries Ltd 294 ITR 121 (Mad) CIT v Max India Ltd 295 ITR 282 SC In the light of the above submissions we request your good self to kindly drop the revision proceedings initiated vide notice u/s.263 dated 18.03.2020 proposing to disallow VAT u/s. 40(a)(iib) of the Act and oblige. If your good self require any further clarification, we shall be happy to provide the same. We would like to be given a personal hearing to explain our stand in the matter. Further assessee has submitted the following details on 22.03.2022. "This is bring to your kind attention that the assessment year for the Assessment year 2014-15, the department has been proposing to disallow under section 40(a)(iib) of the Income Tax Act, 1961, the value added tax (VAT) paid by the Tamilnadu State marketing Corporation Limited. (TASMAC). While TASMAC has been disputing the same issue, it was decided by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequently, the Hon'ble Kerala High Court in the case of M/s. Kerala State Beverages Manufacturing & Marketing Corporation Lid. Vs CIT, Corporate Circle 1(1) in ITA No.135 of 2019 have held that provisions of Section 40(a)(iib) will not apply to surcharge on sales-tax and Turnover tax as they constitute tax and not fees. The issue was taken up by the Revenue before the Hon'ble Supremo Court of India wherein the Hon'ble Supreme Court in the case of M/s. Kerala State Beverages Manufacturing & Marketing Corporation Ltd vs ACIT Circle 1(1) in CA No 11 of 2022 dated 03.01.2022 held that provisions of Sec.40(a)(iib) will not apply to taxes. We are enclosing the said Orders of the Hon'ble Supreme Court of India. In the paragraph 14.1, 14.3 to paragraph 16 of the orders, it has been held that Section 40(a)(iib) will not apply to taxes in view of the basic constitutional distinction between fee and tax. Further, in the provisions of Section 40 distinction between fees and tax has been carefully spelt out and therefore, if the provisions of Sec.40(a)(iib) is interpreted to include tax, that will render meaningless as against the distinction between taxes and fees spelt out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is levied exclusively on; or (B) which is appropriated, directly or indirectly, from, a State Government undertaking by the State Government Explanation.-For the purposes of sub-clause, a State Government undertaking includes- (i) a corporation established by or under Act of the State Government; (ii) a company in which more than fifty per of the equity capital is by the State Government; (iii) a company in which more than fifty per cent of the equity share capital is held by the entity referred to in clause (i) or clause (ii) (whether singly or 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 directly or indirectly, including by virtue of its or rights of shareholders agreements or voting agreements or in other manner; (v) an authority, a or an institution or a body constituted by or under Act of the State Government or owned or controlled by the State Government" 12. In the present case, the Assessee company is fully owned by the Tamilnadu State Government as its entire share capital of Rs.15,00,00,000/- is held by them. 13. In the accounts, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits and gains of business or profession". It is also proposed to define the expression "State Government Undertaking" for this purpose. This amendment will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years. [Clause 7]. 15. It is interesting to note that in page 30 of the annual report of the Assessee Company it is stated that "Others Include refund due from Government towards vend fee, annual privilege fee, special privilege fee. The Commissioner (P&E), Department vide his letter No.P&E 9(1)/17936/2012 dated 13.11.2014 has confirmed as follows: Necessary proposals were sent to Government...for the refund of payment by the TASMAC in respect of vend fee, annual privilege fee and special privilege fee ... After obtaining the orders of the Government, the excess payments paid by the TASMAC will be refunded." 16. The above remarks by the Managing Director of the Assessee Company in their annual report makes it very clear that upto 13.11.2014, the company was paying vend fee, annual privilege fee and special privilege fee etc. to the State Government for most of the part of the Financial Year 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Second Schedule to said Act. Accordingly, the assessee remits the VAT so collected to the State Government on or before 14th of succeeding month after filing necessary return as prescribed in the TamilNadu Value Added Tax Rules, 2007. 4.1 The ld.counsel explained that the VAT expenditure amounting to Rs.11,491.97 crores was claimed and allowed in the assessment order passed by the AO and now, the PCIT want to disallow the claim, in term of the amended provisions of section 40(a)(iib) of the Act. The ld.counsel submitted that the Hon'ble Finance Minister introduced Finance Bill 2013 in the Lok Sabha on 28th February, 2013, to give effect to the financial proposals of the Central Government for the financial year 2013-14. The Bill contained a proposal to amend section 40 of the Income Tax Act. The relevant clause in the Finance Bill reads as under: "7. In section 40 of the Income-tax. Act, in clause (a), after sub-clause (to the following sub-clause shall be inserted with effect from the 1st day of April, 2014, namely:- (iib) 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to quash the revision order passed u/s.263 of the Act, by the PCIT as the issue is neither debatable nor any dispute on this issue is involved and entire jurisprudence is in favour of the assessee. 5. On the other hand, the ld.CIT-DR relied on the revision order passed by the PCIT. 6. We have heard rival contentions and gone through facts and circumstances of the case. We have gone through the revision order passed by PCIT and noted that the PCIT has interpreted the word royalty, license fee, privilege fee, service charge or any other fee or charge by whatever name called, are wide enough to include sales tax i.e., VAT also. According to us, this interpretation is totally wrong because the VAT is levied by the State Government of TamilNadu by the power vested in it under the Entry No.54, List-II, Seventh Schedule, Constitution of India and the assessee pays the State Government VAT as per Section 3(5) of the TNVAT Act, 2006 read with the rate mentioned in Second Schedule to the TNVAT Act, 2006 and claims it as an expenditure u/s.37 r.w.s.43B of the Act, in its income-tax return, which has been disallowed by the Assessing Officer for AY 2017-18 u/s.40(a)(iib) of the Act. We have g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, 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 Rules in the technical sense of the expression. By 'licence fee' or 'fixed fee' is meant the price or consideration which the Government charges to the licensees for parting with its privileges and granting them to the licensees. As the State can carry on a trade or business, such a charge is the normal incident of a trading, or business transaction." The Court then held : "The argument that in Cooverjee's case the impugned power having been exercised in respect of 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 licencees was, "more in the nature of a tax than a licence fee". As the authority which levied the fee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Cement (Bharat) Ltd., vs. CIT, 357 ITR 419, while incorporating the provisions of section 43B of the Act, when it was introduced only the phrase 'Tax and Duty' was introduced and in this context, the Hon'ble Delhi High Court held that fee cannot be considered as tax and hence, cannot be disallowed while invoking the provisions of section 43B of the Act. The Hon'ble Delhi High Court considered this issue as under:- 27. But, in the present case, the cess and cess surcharge do not fall within the characteristics of a tax. As pointed out in Dewan Chand Builders and Contractors (supra), in the case of a cess there exists a reasonable nexus between the payer of a cess and the services rendered............ It was further observed in Hingir Rampur Coal Co. Ltd. (supra) that 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 is a condition precedent for the said services or in return for them, cess is levied against the said area or the said class of persons or trade or business, the cess is distinguishable from a tax and is described as a fee. Furthermore, tax recovered by a public authority invariably goe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by Mr Sabharwal. However, we reiterate that the Supreme Court was not exactly concerned with the question of whether a cess was a tax or not, in all cases. It was generally concerned with the concept of cess as a part of taxation. We must also keep in mind that the Supreme Court was interpreting the Constitution as distinct from interpreting a provision of a statute. .................... 23. So, even if in a particular case, while interpreting the Constitution, the Supreme Court may have regarded cess to be generally a part of taxation, it does not mean that cess would be part of a tax when the said word i.e., 'tax' is used in an Act such as the Income Tax Act which needs to be construed strictly. For this reason also, we feel that the Supreme Court decision in India Cement Ltd. (supra) would not be of any use to the revenue. 6.4 The very fact that taxes are not mentioned in the main section, nor any reference has been made in the memo explaining the introduction of section would go to show that the legislature never intended to disallow taxes under sec 40(a)(iib) of the Act. It is impossible to comprehend that when the legislature proposes to disallow taxes that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ales tax and turnover tax is not a 'fee or charge' coming within the scope of Section 40 (a) (iib) and is not an amount which can be disallowed under the said provision. Therefore the disallowance made in this regard is liable to be set aside. In the result the assessment completed against the appellants with respect to the assessment years 2014-2015, 2015-2016 are hereby set aside. In view of the above, we are of the view that VAT collected and paid by TASMAC under the provisions of TamilNadu Tax Act, 2006 is an allowable expenditure and cannot be disallowed under the amended provisions of section 40(a)(iib) of the Act. 6.5 According to us, the Value Added Tax is not exclusively on TASMAC, Value Added Tax is only the indirect tax collected from customers and remitted to Government on monthly basis after filing necessary monthly return as per the provisions of TamilNadu Value Added Tax Act, 2006 and rules framed thereunder. We find from records that the taxes collected at the rates specified in the VAT Act and passed on to the State Government. The assessee cannot collect at a rate higher than the specified in the act and the entire amount so collected has to be passed on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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