TaxTMI 
TaxTMI 
2016 (3) TMI 461
X X X X Extracts X X X X
X X X X Extracts X X X X
....nder. 2. The petitioner is a company, a Government of Karnataka Undertaking engaged in the business of canalization of liquor, beer and rectified spirit. The Assessing Officer, within whose jurisdiction the Company operates, had passed an assessment order under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act', for brevity) for the Assessment years 2010-11 and disallowed the Privilege Fee of Rs. 570,14,37,000/- and made disallowance under Section 14-A of the Act in a sum of Rs. 36,52,797/- on 27.02.2013. The Assessing Officer had also passed an assessment order under Section 143(3) of the Act for the assessment year 2011-12 and disallowed the Privilege fee of Rs. 695,14,70,000/- made disallowance under Section 14A of the Act in a sum of Rs. 19,20,039/-, disallowance of provision for ex-gratia Rs. 37,52,700/- and disallowance of expenditure on increase in share capital Rs. 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 disallowed the privilege fee of Rs. 829,41,58,944/- and made disallowance under Secti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....v) Amendment made in Section 24 of the Karnataka Excise Act, 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. iii) The payment of privilege fee is not appropriation or application of income and is allowable business expenditure. iv) Issues of amendment to the State Excise Act. v) Submissions on Alternative remedy. Insofar as Section 40(a)(iib) is concerned, the learned counsel would submit that the said sub-clause was inserted by the Finance Act, 2013 with effect from 1.4.2014 and the said section specifically disallows any amount paid by way of privilege fee or which is appropriated directly or indirectly from a State Government undertaking by a State Government. Consequently in view of the said provision, no disallowanc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 1922 Act was similarly worded as Section 40(a)(ii) with one major difference. In that, the word 'cess' was deleted. Thus, in order to bring it into the ambit of disallowance, it would have to be specifically included in the section. It is also pointed out that the words 'royalty' or 'privilege fee' was absent in Section 40(a)(ii) of the Act. It is not levied as any rate or tax on the profits and gains of business or profession or assessed as proportion or otherwise on the basis 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 disallowed privilege fee collected from such wholesale distributors by invoking Section 40(a)(ii). It is also a matter of record that the Central Government Undertakings like BSNL, MTNL pay pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 fee cannot be construed as appropriation of income, as a shareholder of the assessee company, the State Government is receiving dividends for its investment. The privilege fee is being received by the State on account of grant of Distribution licence. One other aspect, namely that the amount of privilege fee fluctuating from year to year as being relatable to profits, is also misleading. The basis for such fluctuation is that the Government determines the levy of fees as a percentage on the value 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....igation Company, (1953) Private Limited vs. CIT Bombay, (1965) 56 ITR 52 (SC) Insofar as the opinion expressed by the Assessing Officer that the amendments made to the Karnataka Excise Act as being illegal, unreasonable, irrational and unscientific, is pointed out as being outside the scope of his jurisdiction and he would have no such authority to pronounce on the said legislation. If the Department was of the view that such 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 pointed out that the petitioner is issued distributorship licence under Rule 3(11) of the 1968 Rules. The State Government has levied privilege fee on the petitioner as per the provisions of Section 24 of the Excise Act and 1968 Rules. "Intoxicating liquors", that is to say, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o 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 Shankar would contend that the disallowance in respect of the years prior to 2014-15 by the Assessing Officer is contended to be bad in law and that it is liable to be set aside. 4. The Respondents 1 and 2 have filed statement of objections, in support of which Shri Neeralgi would contend that any activity conducted in the line of business with an intention to earn profit even if it is a State Government undertaking, the taxable income is determined by taking cognizance of the relatable statutory provisions 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, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rivilege fee, turnover and taxable income of the petitioner, which is indicated in a Tabular form in the body of the Statement of objections, as hereunder: Assessment Year Taxable Income before claiming deduction for privilege fee Amount of privilege fee paid and the date 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% on IML purchase value 38.86 6.62 2010-11 575.93 570.14 18.03.2010 6.9% on IML purchase value 36.80 5.79 2011-12 715.43 695.15 24.03.2011 6.9% on IMIL purchase value 45.49 20.28 It is contended that the above would demonstrate wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pute 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 1.4.2014. This apparently has been held by the Assessing Authority as being clarificatory in nature and has sought to apply it with retrospective effect. In that, the Assessing Officer has passed the assessment order disallowing the privilege fee paid as business expenditure on the very date of the Budget. Though the Assessing Officer has taken a view that the privilege fee would be disallowed as business expenditure even prior to the amendment by insertion of subclause (iib) of clause (a) of Section 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 s....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... offered in auctions held for granting those rights to licensees. The power of the Government to charge a price for parting with its rights and not the mode of fixing that price is what constitutes the essence of the matter. Nor indeed does the label affixed 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 Mathews vs. Chickor Marketing Board, 60 CLR 263, 276. A fee is a charge for special services rendered to individuals by some governmental agency and such a charge has an element in it of a quid pro quo. Commissioner H.R.E. Madras vs. Lakshmindra Thirtha Swamiar, 1954 SCR 1005, 1041 = (AIR 1954 SC 282 at p. 295). Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country M/s. Guruswamy & Co. v....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... with retrospective effect. There are other provisions which were also amended, and wherever the Legislature intended that certain provisions would have retrospective effect, it is expressly indicated therein and therefore, there being no such express indication insofar as the present provision with which we are concerned, it cannot be said to be applicable with retrospective effect. This is also evident from the CBDT circular No.3/2014 dated 24.01.2014 issued by the Department, which would be binding on the Assessing Authority, the relevant portion of which reads as follows: "12. Disallowance of certain fee, charge, etc. 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 Government undertakings as to whether any sum paid by way of privilege fe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Bill seeks to amend Section 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 called which is levied exclusively on or any amount which is appropriated, whether directly or indirectly, from a State Government undertaking by the State Government, shall not be allowed as deduction in computing the income chargeable under the head "Profits and gains of business or profession". It is further proposed to define the expression "State Government undertaking" used in the proposed new sub-clause (iib). 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." Therefore, it can safely be said that the privilege fee payable by the petitioner to the State Go....