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Before: Shri S.S. Viswanethra Ravi & Shri Jagadish
Years: 2018-19 M/s. Tamilnadu State Marketing Vs. The Deputy Commissioner of Corporation Limited, CMDA Tower II, Income Tax, IV Floor, Gandhi Irwin Bridge Road, Corporate Circle 3(1), Egmore, Chennai 600 008. Chennai 600 034. [PAN: AAACT2964P] (अपीलाथ�/Appellant) (��थ�/Respondent) अपीलाथ� की ओर से / Appellant by : Shri R. Vijayaraghavan, Advocate & Shri Saroj Kumar Parida, Advocate ��थ� की ओर से/Respondent by : Shri R. Clement Ramesh Kumar, CIT सुनवाई की तारीख/ Date of hearing : 08.08.2024 घोषणा की तारीख /Date of Pronouncement : 23.08.2024 आदेश /O R D E R
PER S.S. VISWANETHRA RAVI, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order dated 31.03.2024 passed by the ld. Principal Commissioner of Income Tax,Chennai-3, Chennai under section 263 of the Income Tax Act, 1961 [“Act” in short] for the assessment year 2018-19.
The ld. PCIT initiated proceedings under section 263 of the Act on an examination of books of account, wherein, it was noted that the assessee had debited a sum of ₹.14930,54,85,164/- as VAT expenses and debited the same in the profit and loss account. According to the ld. PCIT, the said VAT expenses in the books of accounts of TASMAC is a levy by the Tamil Nadu State Government on the State Government Undertaking and it perfectly fixing to the clause ‘any other fee of charge’, “by whatever name called” as per section 40(a)(iib) of the Act. Accordingly, he held that the value added tax is a tax on value addition done by each party of the supply chain like supplier, producer, wholesaler, distributor or retailer, etc. which is not in the case of TASMAC. By holding so, the ld. PCIT directed the Assessing Officer to give effect to the above directions and compute total income after correcting set off losses in accordance with law.
The ld. AR Shri R. Vijayaragahavan, Advocate placed on record the order of this Tribunal dated 14.11.2022 in in assessee’s own case for the assessment year 2014-15 and argued that this Tribunal, by basing on the decision of the Hon’ble Supreme Court in the case of Kerala State Beverages Manufacturing & Marketing Corporation Ltd. v. ACIT in I.T. Appeal Nos. 135, 146 & 313 of 2019 dated 30.04.2020, observed that the VAT tax payable by the assessee to the State Government is neither in the nature of royalty, licence fee, service fee, privilege fee, service charge nor any other fee or charge, by whatever name called, nor it is levied exclusively on the assessee nor it can be considered as appropriation by the State Government and held that VAT payment would not attract the provisions of section 40(a)(iib) of the Act. The ld. AR prayed to allow the grounds.
The ld. DR Shri R. Clement Ramesh Kumar, CIT submits that the order of this Tribunal in assessee’s own case for the AY 2014-15 is not applicable to the facts on hand. The ld. PCIT considered the said order and observed, hardly there is any doubt that the assessee company is enjoying monopoly on sale of liquor in Tamil Nadu State, though the assessee company tried to say that other vendors are there in the market, which is contrary to the facts mentioned in the order of the High Court, ITAT and the Assessing Officer, etc. He argued vehemently that the assessee has not evidenced that there are other players in the market in violation of Tamil Nadu Prohibition Act, 1937. He argued, further, considering all contentious issues observed in para 14 of the impugned order, the ld. PCIT rightly invoked jurisdiction to hold the VAT on sale of liquor is levied exclusively on the assessee and provisions under section 40(a)(iib) of the Act is violated. Thus, the ld. DR prayed to dismiss the grounds raised by the assessee.
Heard both the parties and perused the material available on record. On perusal of the order dated 14.11.2022 passed by the Tribunal in assessee’s own case for the AY 2014-15, we note that the Tribunal quashed the order passed by the ld. PCIT under section 263 of the Act by holding that the VAT payments would not attract the provisions under section 40(a)(iib) of the Act to the fact. Further, held the said payment is allowable under section 37 r.w.s. 43B of the Act, we find that in order to arrive the said findings, the Tribunal referred to many decisions, which are part of the order at para 6.1, 6.2, 6.3 and 6.4. For ready reference, the relevant portions of the order in para 6 to 6.5 are reproduced herein below: 6. We have heard rival contentions and gone through facts and circumstances of the case. We have gone through the revision order passed by PCIT and noted that the PCIT has interpreted the word royalty, license fee, privilege fee, service charge or any other fee or charge by whatever name called, are wide enough to include sales tax i.e., VAT also. According to us, this interpretation is totally wrong because the VAT is levied by the State Government of TamilNadu by the power vested in it under the Entry No.54, List- II, Seventh Schedule, Constitution of India and the assessee pays the State Government VAT as per Section 3(5) of the TNVAT Act, 2006 read with the rate mentioned in Second Schedule to the TNVAT Act, 2006 and claims it as an expenditure u/s.37 r.w.s.43B of the Act, in its income-tax return, which has been disallowed by the Assessing Officer for AY 2017-18 u/s.40(a)(iib) of the Act. We have gone through the Constitution of India, and are of the view that the list of areas which fall within the exclusive power of States are given in the List II of the Seventh Schedule. State has the exclusive power to levy taxes on sale and purchase of intoxicating liquor (Entry 54). But the power to levy fees in respect of matters in the List is given under a different entry (Entry No 66). Thus, the State derives power to levy sales tax (VAT) on liquor under entry 54 and power to levy fees in connection with production, manufacture, transportation etc. is derived under Entry no 69 of the List II of VII schedule the Constitution of India. So, the power of State Government to levy tax on sale and purchase of liquor and power to levy fees are two different powers and are derived from two different entries in the State list. Thus, fees levied by whatever name called
under the power granted under Entry 69 cannot encompass tax levied by virtue of Entry 54. 6.1 We noted that the definition of fee charge is very clearly distinguished from tax by the Hon’ble High Court in the case of Har Shankar vs. Deputy Excise and Taxation Commissioner, AIR 1975 SC 1121 and has founded on the distinction between tax and fee and the characteristics of these two, as also excise duty and held as under:- “Since rights in regard to intoxicants belong to the State, it is open to the Government to part with those rights for a consideration. By Article 298 of the Constitution, the executive power of the State extends to the carrying on of any trade or business and to the, making of contracts for any purpose.” Again, it has been observed in that decision: “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".(1) A fee is a charge for special services rendered to individuals by some government tat agency and such a charge has an element in it of a quid pro quo. (2). Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country (3). The amounts, charged to the licensees in the instant case are, evidently, neither nature of tax nor excise duty. But then, the 'Licence fee' which the State government charged to the licensees through the medium of auctions or the 'Fixed fee' which it charged to the vendors of foreign. liquor holding licences in Forms L-3, L-4 and L- 5 need bear no, quid pro quo to the services rendered to the licencees. The word 'fee' is not used in the Act or the Rules in the technical sense of the expression. By 'licence fee' or 'fixed fee' is meant the price or consideration which the Government charges to the licensees for parting with its privileges and granting them to the licensees. As the State can carry on a trade or business, such a charge is the normal incident of a trading, or business transaction.” The Court then held : “The argument that in Cooverjee's case the impugned power having been exercised in respect of a centrally administrated area, the power was not fettered by legislative lists loses its relevance in the view we ,:are taking. It is true that in that case it was permissible to the court to find, as in fact it did, that the fee imposed on the licencees was, “more in the nature of a tax than a licence fee". As the authority which levied the fee had the power to exact a tax, the levy could be upheld as a tax, even if it could not be justified as a 'fee', in the constitution sense of that term. But the 'Licence fee' or 'Fixed fee' in the instant case does not have to conform to the requirement that it must bear a reasonable relationship with the services rendered to the licensees. The amount charged to the licensees is not a fee properly so- called nor indeed a tax but is in the nature of the price of a privilege, which the purchaser has to pay in any trading or business transaction.” 6.2 Further, Hon’ble Supreme Court in the case of Om Prakash Agarwal vs. Giri Raj Kishori & Others, 164 ITR 376 have noticed the difference between tax and fee and has held that State Government cannot levy tax under the guise of fee. The Hon’ble Supreme Court held as under:- “The three principal characteristics of a tax noticed by Mukherjea, J. in the above passage are: (i) that it is imposed under statutory power without the tax-payer's consent and the payment is enforced by law; (ii) that it is an imposition made for public purposes without reference to any special benefit to be conferred on the payer of the tax; and (iii) that it is apart of the common burden, the quantum of imposition upon the tax-payer depending generally upon the capacity of the tax payer to pay. As regards fees Mukherjea, J. Observed in the above decision thus: "Coming now to fees, a "fee" is generally defined to be a charge for a special service rendered to individuals by some governmental agency. The amount of fee levied is supposed to be based on the expenses incurred by the government in rendering the service, though in many cases the costs are arbitrarily assessed. Ordinarily, the fees are uniform and no account is taken of the varying abilities of different recipients to pay. These are undoubtedly some of the general characteristics, but as there may be various kinds of fees, it is not possible to formulate a definition that would be applicable to all cases. …………. If, as we hold, a fee is regarded as a sort of return or consideration for services rendered, it is absolutely necessary that the levy of fees should on the face of the legislative provision, be correlated to the expenses incurred by government in rendering the services." 6.3 Further, the Hon’ble Delhi High Court in the case of Dalmia Cement (Bharat) Ltd., vs. CIT, 357 ITR 419, while incorporating the provisions of section 43B of the Act, when it was introduced only the phrase ‘Tax and Duty’ was introduced and in this context, the Hon’ble Delhi High Court held that fee cannot be considered as tax and hence, cannot be disallowed while invoking the provisions of section 43B of the Act. The Hon’ble Delhi High Court considered this issue as under:- 27. But, in the present case, the cess and cess surcharge do not fall within the characteristics of a tax. As pointed out in Dewan Chand Builders and Contractors (supra), in the case of a cess there exists a reasonable nexus between the payer of a cess and the services rendered………… It was further observed in Hingir Rampur Coal Co. Ltd. (supra) that if specific services are rendered to a specific area or to a specific class of persons or trade or business in any local area and is a condition precedent for the said services or in return for them, cess is levied against the said area or the said class of persons or trade or business, the cess is distinguishable from a tax and is described as a fee. Furthermore, tax recovered by a public authority invariably goes into the consolidated fund which is ultimately utilized for all public purposes whereas a cess levied by way of a fee is not intended to be and does not become a part of the consolidated fund. It is earmarked and set apart for the purpose of services for which it is levied. While coming to this conclusion the Hon’ble Delhi High Court has considered and distinguished the case of India Cement Ltd. v. State of Tamil Nadu: 188 ITR 690 and held as under:- 21. This takes us to the consideration of the issue as to whether cess is the same thing as a tax and that even though the word "cess" was not used in Section 43B(a) as it originally stood, it always included cess inasmuch as tax was covered in the said provision. We find ourselves in agreement with the submission made by Mr Mehta that the decision of the Supreme Court in India Cement Ltd. (supra) would not be of any help to the revenue inasmuch as the issue there was entirely different. The focus in that decision was not on whether a cess was a tax or not but whether levy of cess on royalty was within the competence of the State Legislature. We also feel that the considerations with regard to cess in that case were in the context of legislative competence of the State Legislature to levy the cess on royalty which, by virtue of an explanation to Section 115 of the Tamil Nadu Panchayats Act, 1958, were said to be included in the meaning of land revenue. In that case, it was not in dispute that the cess which the Madras Village Panchayat Act proposes to levy was nothing but an "additional tax" and originally it was levied only on land revenue, and that apparently land revenue would fall within the scope of Entry 49 of List II in Schedule VII to the Constitution. The Supreme Court however held that it could not be doubted that royalty which was a levy or tax on the extracted mineral was not a tax or levy on land alone and that if cess was charged on the royalty, it could not be said to be a levy or tax on land and therefore, it could not be upheld as imposed in exercise of jurisdiction under Entry 49 List II by the State Legislature. The Court held that the legislature went beyond its jurisdiction under Entry 49 List II and therefore the levy was clearly without the authority of law.
These observations whereby there is some indication that cess has been equated with tax have been sought to be relied upon by Mr Sabharwal. However, we reiterate that the Supreme Court was not exactly concerned with the question of whether a cess was a tax or not, in all cases. It was generally concerned with the concept of cess as a part of taxation. We must also keep in mind that the Supreme Court was interpreting the Constitution as distinct from interpreting a provision of a statute. ………………..
So, even if in a particular case, while interpreting the Constitution, the Supreme Court may have regarded cess to be generally a part of taxation, it does not mean that cess would be part of a tax when the said word i.e., 'tax' is used in an Act such as the Income Tax Act which needs to be construed strictly. For this reason also, we feel that the Supreme Court decision in India Cement Ltd. (supra) would not be of any use to the revenue. 6.4 The very fact that taxes are not mentioned in the main section, nor any reference has been made in the memo explaining the introduction of section would go to show that the legislature never intended to disallow taxes under sec 40(a)(iib) of the Act. It is impossible to comprehend that when the legislature proposes to disallow taxes that the State Government has levied under its exclusive domain, such tax is not specifically mentioned in the section but allowed to be derived from the phrase “charges by whatever name called” particularly when the Apex Court has clearly laid down the distinction between taxes and fees and have held that Taxes cannot be levied under the guise of fees. We noted that TASMAC cannot collect Privilege Fees/ Vend fees separately from the Purchasers. Value Added Tax is collected from the Customers. It is collected on behalf of the Government and passed on to the Government totality. A trader can collect Value Added Tax as per the provisions of the Act and nothing more. The entire amount so collected is passed on to the Government. In this manner also, Value Added Tax, which is separately collected from the Purchaser, is different and distinct from the charges mentioned in S.40(a)(iib) of the Act, which are borne by the TASMAC and cannot be collected from the purchaser. As referred by ld.counsel, the recent decision of Hon’ble Kerala High Court in the case of Kerala State Beverages (Manufacturing and Marketing) Corporation Ltd., vs. ACIT, in I.T. Appeal Nos.135, 146 & 313 of 2019 dated 30.04.2020 considered an identical fact and legal situation, deleted the disallowance of surcharge on sales tax and turnover tax by observing as under:- 22. On analysing the rival 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. Inorder 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. the surcharge on sales tax and turnover tax is not a 'fee or charge' coming within the scope of Section 40 (a) (iib) and is not an amount which can be disallowed under the said provision. Therefore the disallowance made in this regard is liable to be set aside. In the result the assessment completed against the appellants with respect to the assessment years 2014-2015, 2015-2016 are hereby set aside. In view of the above, we are of the view that VAT collected and paid by TASMAC under the provisions of TamilNadu Tax Act, 2006 is an allowable expenditure and cannot be disallowed under the amended provisions of section 40(a)(iib) of the Act. 6.5 According to us, the Value Added Tax is not exclusively on TASMAC, Value Added Tax is only the indirect tax collected from customers and remitted to Government on monthly basis after filing necessary monthly return as per the provisions of TamilNadu Value Added Tax Act, 2006 and rules framed thereunder. We find from records that the taxes collected at the rates specified in the VAT Act and passed on to the State Government. The assessee cannot collect at a rate higher than the specified in the act and the entire amount so collected has to be passed on to the Government and it is not out of any surplus available and therefore VAT collected cannot be considered as surplus appropriated by the State Government. We also noted that even the provision of section 40(a)(iib) of the Act cannot be applied as the value added tax payment is not an appropriation so as to bring the sum within the ambit of provisions of section 40 (a)(iib) of the Act. In sum up, we state that the Value Added Tax payable by the assessee to the State Government is a. Neither in the nature of royalty, licence fee, service fee, privilege fee, service charge nor any other fee or charge, by whatever name called. b. Nor is it levied exclusively on the Assessee. c. Nor can it be considered as appropriation by the State Government. According to us, the VAT payment would not attract the provisions of section 40(a)(iib) of the Act and hence, is allowable u/s.37 r.w.s.43B of the Act, as claimed by the assessee. Hence, we quash the revision order passed by PCIT and allow the claim of assessee.
Further, we note that this tribunal dismissed the appeal of the Revenue on the same issue for AY 2015-16 in vide order dated 30.01.2024, wherein, it was observed that there was no order brought on record by the Revenue contrary to the view taken in AY 2014-15. Before us, in this proceeding also, no order contrary to the view taken in AY 2014-15 was brought on record by the Revenue. Therefore, we find that the facts and circumstances of the case are similar to AY 2014-15 and 2015-16 in assessee’s own case, wherein, it was held that VAT payment would not attract the provisions of section 40(a)(iib) of the Act. Thus, following the same, we hold that the order of the ld. PCIT in setting aside the assessment order under section 143(3) r.w.s. 143(3A) & 143(3B) of the Act dated 13.04.2021 is erroneous and prejudicial to the interest of Revenue, is not justified. Therefore, the grounds raised by the assessee in seeking to quash the order passed by the ld. PCIT under section 263 of the Act are allowed.
In the result, the appeal filed by the assessee is allowed. Order pronounced on 23rd August, 2024 at Chennai.