TaxTMI 
TaxTMI 
TaxTMI 
2020 (5) TMI 176
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....ala, and is a 'State Government Undertaking' falling within the 'Explanation' provided under Section 40 (a) (iib) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act' for short). With respect to the assessment year 2014-2015, the Deputy Commissioner of Income Tax, Circle-2 (1), Thiruvananthapuram finalized the assessment of income tax against the appellant, under Section 143 (3) of the Act, through the order of assessment dated 14- 12-2016. But, the Principal Commissioner of Income Tax, Thiruvananthapuram initiated proceedings under Section 263 of the Act and set aside the order of assessment, on holding that the same is erroneous and is prejudicial to the interest of the revenue, to the extent it failed to disallow the debits made in the Profit and Loss Account of the assessee with respect to the amount of surcharge on sales tax and turn over tax paid to the State Government, which ought to have been disallowed under Section 40 (a) (iib) of the Act. Against order of the Principal Commissioner of Income Tax, issued under Section 263 of the Act, dated 25-09-2018, the appellant approached the Tribunal in ITA No.536/Coch/2018. 3. With respect to the assessment year 2015-....
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....treating them as amounts paid by the assessee "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" the assessee. 7. With respect to the assessment year 2014-2015 the Principal Commissioner of Income Tax, while setting aside the original assessment, directed the Assessing Officer to disallow an amount of Rs. 96,076.20 lakhs debited to the Profit and Loss Account of the assessee towards surcharge on sales tax and turn over tax, by invoking Section 40 (a) (iib). With respect to the assessment year 2015-2016 the Assessing Officer had disallowed a total debit of Rs. 811,90,88,115/- being the amount paid as, Gallonage Fee, Licence Fee, Shop Rental (kist) and Surcharge on Sales Tax, which was confirmed by both the appellate authorities. 8. For a better appreciation of the question of law raised, it is necessary to evaluate the relevant provisions in the Act. Chapter IV of the Act deals with computation of business income. Section 40 provides about the amounts which are not deductable while computing the business income. It specifies the amounts which shall not be deducted in comput....
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....xpression - State Government Undertaking for this purpose includes- (i) a corporation established by or under any Act of the State Government; (ii) a company in which more than fifty per cent of the paid-up equity share capital is held by the State Government; (iii) a company in which more than fifty per cent of the paid-up equity share capital is held by the entity referred to in clause (i) or clause (ii) (whether singly or taken 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 decisions, directly or indirectly, including by virtue of its shareholding or management rights or shareholders agreements or voting agreements or in any other manner; (v) an authority, a board or an institution or a body established or constituted by or under any Act of the State Government or owned or controlled by the State Government;" On the basis of the contentions raised by both side, we may now deal with the question regarding disallowance of each of the items of fee or charges, separately; 9. Gallonage Fee The Assessing Officer found that the Gallonage Fee is levied as pe....
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....nd central government undertakings as well as on private licencees., the levy of Gallonage Fee on the assessee is not an 'exclusive levy' imposed on the assessee as a state government undertaking, was the contention. 10. The first appellate authority found that, merely because a fee in the name of Gallonage Fee is levied under Rule 14 of the Kerala Rectified Spirit Rules also, it is not relevant for the purpose of examining applicability of Section 40 (a) (iib), with respect to fee paid under the Foreign Liquor Rules. As long as the FL-9 licence is exclusively granted to the appellant, the Gallonage Fee paid by the appellant is an 'exclusive levy' on the assessee, which will attract provisions of Section 40 (a) (iib), is the finding. The view held by the first appellate authority was also reiterated by the Tribunal, in the order passed on 12-03- 2019. It was held that, the fact that a fee in the name of Gallonage Fee is also levied under Kerala Rectified Spirit Rules, 1972, is not relevant for the purpose of examining applicability of the provisions under Section 40 (a) (iib), with respect to the fee paid under the Foreign Liquor Rules, the Tribunal held. 11. Before this court, l....
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....olicitor General of India, as long as it is not in dispute that the wholesale trade in foreign liquor under FL-9 licence is an exclusive trade in the state permitted to the assessee herein alone, the Gallonage Fee levied under the Foreign Liquor Rules becomes an 'exclusive levy' on the assessee. Therefore we are of the considered opinion that the levy of Gallonage Fee with respect to the wholesale trade under the FL-9 licence will squarely fall within the scope of the disallowances provided under Section 40 (a) (iib). Hence the finding of the Tribunal in this regard need to be upheld. 13. Licence Fee and Shop Rental (Kist). Licence fee is levied under Section 18 of the Abkari act and under the provisions of the Foreign Liquor Rules. The assessee is paying licence fee with respect to the FL-9 licence, for the warehouses in the wholesale trade. They are also paying licence fee with respect to FL-1 shops (retail outlets) wherein foreign liquor in sealed bottles are sold. As discussed above, the business activities under FL-9 licence is the monopoly of the assessee. Assessee is the exclusive licencee with respect to the wholesale trade. With respect to FL-1 licence for retail trading....
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....s court, learned counsel for the appellant argued that, the licence fee as well as shop rental (kist) are also not levies paid directly to the State Government and they are not levies imposed exclusively on the appellant. Those levis are also imposed on other dealers who are licenced for same type of trade and those are levies charged on other traders by virtue of similar provisions in other statutes. On the other hand, learned Assistant Solicitor General of India contended that, the licence fee is charged specifically and exclusively on the assessee with respect to each premises of the business sanctioned under FL-9 licence. Similarly the licence fee is levied with respect to FL-1 licences, only from two state government undertakings, the appellant and the Consumer Federation. Therefore it is contended that the licence fee are levied exclusively on the state government undertakings, on vesting with them the right and privilege of retail trade of foreign liquor. Hence the licence fee will squarely fall within the ambit and scope of the disallowances enumerated under Section 40 (a) (iib). It is on the basis of the 'exclusivity' provided with respect to the state government owned cor....
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....rnment undertakings, and it is not any fee or charge which is levied exclusively from the assessee by the state government. Therefore the question is whether the 'exclusivity' will be lost if it is levied from more than one State Government undertaking. Sub-clause (iib) of Clause (a) of Section 40 provides that, any amount paid by way of royalty, licence fee, service fee, privilege fee, service charge, or any other fee or charge "which is levied exclusively on" a state government undertaking by the State Government (emphasis supplied) alone will satisfy the ingredients for disallowance. The statute has not used the word; levied exclusively on the state government undertakings by the State Government. Instead, the word used is "exclusively on" "a state government undertaking". Therefore, inorder to bring the disallowance within the ambit and scope of Section 40 (a) (iib), it should be an exclusive levy on the assessee, which should be a state government undertaking. Since the licence fee and shop rental (kist) are also levied from the Consumer Federation with respect to the FL-1 licence granted, it becomes out of the purview of the term 'levied exclusively on a state government unde....
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....arge, or any other fee or charge by whatever name called", would clearly indicate that the disallowance is intended with respect to 'fee or charges' and it will not take within its ambit and scope any amount collected by way of tax. The categorisation of surcharge also under the group of 'fee or charges' provided under Section 40 (a) (iib), by the Assessing Officer by depending upon the wording, "by whatever name called" cannot be sustained, because the principle of ejusdem generis would apply and it should be of the same kind of 'fee or charge'. Surcharge on sales tax is nothing but sales tax and the wording of the Kerala Surcharge on Taxes Act itself would make it clear that an increase with respect to the tax payable under Section 5 (1) of the KGST Act is the only effect of the legislation. In other words, surcharge is introduced as an increment in the sales tax payable, and nothing else. It was also argued that the payment of tax is compulsory and refusal to pay would invite punishment. There is no direct quid pro quo between the tax payer and the levying authority. A 'fee or charge' is a compulsory payment to be made for special service rendered by the Government. It confers a....
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.... it is provided that, provisions of the KGST Act shall apply in relation to surcharge, as they apply in relation to tax payable under the KGST Act. It is pointed out that, from a plain reading of the provision it is clear that surcharge on sales tax is nothing but a tax and it partakes all the characteristics of tax levied under a specific fiscal statute. Hence the disallowance is made only by way of rewriting Section 40 (a) (iib), under the guise of interpreting the said provision, is the argument. From a plain reading of Section 40 (a) (iib) it is clear that, the provision was never intended to apply to the taxes levied by the state in exercise of its sovereign power. Learned counsel had drawn attention of this court to the CBDT Circular No.3 of 2014, which specifically made it clear that, only the privilege fee, licence fee, royalty etc will fall within the category of 'fee or charges' and it will not be applicable to 'taxes' such as sales tax. Therefore it is contended that the application of Section 40 (a) (iib) in the case of surcharge on sales tax would directly goes against the aforesaid Circular. 20. Learned Assistant Solicitor General of India pointed out that, on an ana....
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....contentions, we take note of the fact that the surcharge on sales tax was introduced only as an increase in the tax payable. Merely because the statute imposed a prohibition with respect to passing on such liability to others, the basic characteristics of the levy is not changed. As settled through various legal precedents, a 'tax' cannot by equated with a 'fee or charge'. When the provisions contained in Section 40 (a) (iib) is clear in its terms that it will take in only 'fee or charges' enumerated therein or any 'fee or charge by whatever name called, it is clear that any levy of 'tax' is outside the ambit and scope of the said provision. In order to include surcharge on sales tax or turnover tax within the sweep of Section 40 (a) (iib), it becomes necessary to read something into the provision. Therefore we are inclined to accept the view as contended by the appellant, that the disallowance of surcharge on sales tax and turnover tax cannot be sustained. 23. While summing up the conclusions, we are persuaded to answer the question of law raised, partly in favour of the revenue and partly in favour of the assessee. We hold that the levy of Gallonage Fee, Licence Fee and Shop Ren....