VAT is not a fee or charge under section 40(a)(iib), so disallowance could not be sustained.

Section 40(a)(iib) disallows specified levies such as royalty, licence fee, service fee, privilege fee, service charge and other fee or charge, but that language does not extend to a tax levy. Applying the Supreme Court's interpretation of the provision, VAT paid by a State undertaking was treated as a tax, not a fee or charge, because the Act distinguishes tax from fee. On that basis, VAT could not be brought within the disallowance clause, and the addition for VAT disallowance was rightly deleted in favour of the assessee.

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Issues: Whether VAT paid by a State undertaking is liable to disallowance under section 40(a)(iib) of the Income-tax Act, 1961 as being an amount in the nature of any other fee or charge.

Analysis: The appeal turned on the proper scope of section 40(a)(iib), which disallows specified levies such as royalty, licence fee, service fee, privilege fee, service charge and any other fee or charge. The Court followed the Supreme Court's ruling on the same provision and the same statutory setting, which held that VAT is a tax and not a fee or charge. The binding principle applied was that the expression fee or charge cannot be expanded to include a tax levy, because the statute itself maintains a clear distinction between tax and fee. On that basis, VAT did not fall within the disallowance provision.

Conclusion: The VAT disallowance under section 40(a)(iib) was not sustainable and the deletion of the addition was upheld in favour of the assessee.

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