Guarantee commission to State Government falls outside section 40(a)(iib) where it is contractual, not an exclusive statutory levy.

Guarantee commission paid by a State Government undertaking to the Government of Karnataka was analysed under section 40(a)(iib) of the Income-tax Act, 1961. The provision was held to apply only to royalty, licence fee, service fee, privilege fee, service charge or similar levies imposed exclusively on a State Government undertaking by the State Government. The commission here arose as contractual consideration for guarantees issued under the Karnataka Ceiling on Government Guarantees Act, 1999, not as a compulsory statutory levy, and it was not shown to be an exclusive charge on the assessee. The disallowance was therefore not sustainable.

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Issues: Whether guarantee commission paid by a State Government undertaking to the Government of Karnataka is disallowable under section 40(a)(iib) of the Income-tax Act, 1961.

Analysis: Section 40(a)(iib) applies only where the payment is by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge levied exclusively on a State Government undertaking by the State Government. The guarantee commission in question arose from guarantees issued under the Karnataka Ceiling on Government Guarantees Act, 1999 and was payable as a contractual consideration, not as a compulsory exaction or levy. The charge was also not exclusive to the assessee, since guarantees were extended to various government departments and government-related entities. The statutory language was therefore held not to cover such commission, and the disallowance could not be sustained.

Conclusion: Guarantee commission paid to the State Government is not covered by section 40(a)(iib) and the disallowance is not sustainable.

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