VAT paid by a State undertaking is outside section 40(a)(iib) when it is a tax, not an exclusive fee or charge.

VAT collected under a State taxing statute and remitted to the Government was held not to fall within section 40(a)(iib) of the Income-tax Act, because that provision is confined to royalty, licence fee, service fee, privilege fee, service charge or similar charges levied exclusively on a State Government undertaking, or amounts appropriated from it by the State Government. The tribunal distinguished tax from fee, found no quid pro quo or exclusive levy, and treated the VAT payment as outside the disallowance. On that basis, the revision under section 263 was also held unsustainable, and the assessee's deduction claim was upheld.

---

---

Issues: Whether Value Added Tax paid by a State Government undertaking on liquor sales is covered by section 40(a)(iib) of the Income-tax Act, 1961 so as to be disallowable, and whether revision under section 263 of the Income-tax Act, 1961 was justified.

Analysis: Section 40(a)(iib) disallows only royalty, licence fee, service fee, privilege fee, service charge or other fee or charge, by whatever name called, when levied exclusively on a State Government undertaking, and also amounts appropriated directly or indirectly from such undertaking by the State Government. The VAT in question was held to be a tax collected from customers under the Tamil Nadu Value Added Tax Act, 2006 and remitted to the Government, not a fee or charge for a special benefit. It was further held that VAT was not levied exclusively on the assessee and was not an appropriation of profits. The distinction between tax and fee, the absence of quid pro quo, and the strict construction of the disallowance provision supported the assessee's claim.

Conclusion: Section 40(a)(iib) does not apply to VAT paid by the assessee, the revision order under section 263 was unsustainable, and the assessee's deduction claim was upheld.

Final Conclusion: The assessment disallowance was set aside and the assessee's appeal succeeded.

Ratio Decidendi: A tax collected under a State taxing statute is not a fee or charge within section 40(a)(iib), and cannot be disallowed under that provision unless it is shown to be an exclusive fee or an appropriation from the State Government undertaking.

---