State ‘exclusivity’ for disallowance of certain fee, charge, etc. is to be viewed from the nature, not the number of undertakings on which the levy is imposed: SC

Supreme Court: The Division Bench of R. Subhash Reddy* and Hrishikesh Roy, JJ., held that to determine State Monopoly for disallowance of certain fee, charge, etc. in the case of State Government Undertakings the aspect of ‘exclusivity’ has to be viewed from the nature of undertaking on which levy is imposed and not on the number of undertakings on which the levy is imposed. The Bench stated,

“If this aspect of exclusivity is viewed from the nature of undertaking, in this particular case, both KSBC and Kerala State Cooperatives Consumers’ Federation Ltd. are undertakings of the State of Kerala, therefore, levy is an exclusive levy on the State Government Undertakings.”

Background

The issue before the Bench was whether the appellant-Kerala State Beverages Manufacturing & Marketing Corporation Ltd., a company engaged in wholesale and retail trade of beverages exempted from levy of gallonage fees, licence fee and shop rental (kist) for FL9 licence and FL1 licence, surcharge on sales tax and turnover tax for the assessment years 2014-2015 and 2015-2016?

The case of the appellant was that the company did not fall within the purview of Section 40(a)(iib), while the case of the revenue was that all the aforesaid amounts were covered under Section 40(a)(iib) as such, such amounts were not deductible for the purpose of computation of income. Section 40 of the Income Tax Act, 1961 is the provision dealing with ‘amounts not deductible’. However, by the Finance Act, 2013 (Act 17 of 2013), Section 40 of the Act was amended by inserting Section 40(a)(iib).

Findings of the High Court

The question of law raised was answered by the High Court of Kerala partly in favour of assessee/appellant and partly in favour of the revenue in the following manner:

“We hold that the levy of Gallonage Fee, Licence Fee and Shop Rental (kist) with respect to the FL9 licences granted to the appellant will clearly fall within the purview of Section 40 (a) (iib) and the amount paid in this regard is liable to be disallowed. The amount of Gallonage Fee, Licence Fee, or Shop Rental (kist) paid with respect to FL1 licences granted in favour of the appellant, with respect to the retail business in foreign liquor, is not an exclusive levy on the appellant, which is a state government undertaking. Therefore the disallowance made with respect to those amounts 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 20142015, 20152016 are hereby set aside.”

State Monopoly

During the assessment years 2014-2015 and 2015-2016 the appellant was holding FL9 and FL1 licences to deal in wholesale and retail of Indian Made Foreign Liquor (IMFL) and Foreign Made Foreign Liquor (FMFL) granted by the Excise Department Rules. The appellant was the only licence holder for the relevant years so far as licence to deal in wholesale, and so far as FL1 licences were concerned, it was also granted to one other State owned Undertaking, i.e., Kerala State Cooperatives Consumers’ Federation Ltd.

By interpreting the word ‘exclusively’ as worded in Section 40(a)(iib)(A) of the Act, High Court in the impugned order had held that the levy of gallonage fee, licence fee and shop rental (kist) with respect to FL9 licences granted to the appellant would clearly fall within the purview of Section 40(a)(iib) of the Act and the amounts paid in that regard was liable to be disallowed. At the same with respect to FL1 licences granted in favour of the appellant for retail business, it was held that it was not an exclusive levy; as such disallowance made with respect to the same could not be sustained.

Considering the relevant Memorandum to the Finance Act, 2013 and underlying object for amendment of Income Tax Act, 2013, the Bench opined that the amendment was made to plug the possible diversion or shifting of profits from these undertakings into State’s treasury. Hence, in view of Section 40(a)(iib) of the Act any amount which is  levied exclusively on the State owned undertaking cannot be claimed as a deduction in the books of State owned undertaking, thus same is liable to income tax.

Disagreeing with the view taken by the High Court, the Bench opined that if the amended provision is to be read in the manner interpreted by the High Court, it will literally defeat the very purpose and intention behind the amendment. The Bench stated,

“The aspect of exclusivity under Section 40(a)(iib) is not to be considered with a narrow interpretation, which will defeat the very intention of Legislature, only on the ground that there is yet another player, viz., Kerala State Cooperatives Consumers’ Federation Ltd. which is also granted licence under FL1.”

The Bench added, the aspect of ‘exclusivity’ under Section 40(a)(iib) had to be viewed from the nature of undertaking on which levy is imposed and not on the number of undertakings on which the levy is imposed. Since both the undertakings; i.e. KSBC and Kerala State Cooperatives Consumers’ Federation Ltd. were undertakings of the State, the Bench held that levy was an exclusive levy on the State Government Undertakings.

Fee vis-a-vis Tax

Observing that a clear distinction between ‘fee’ and ‘tax’ was carefully maintained throughout the scheme under Section 40(a) of the Act itself, as wherever the Parliament intended to cover the tax it specifically mentioned as a tax, the Bench stated that Section 40(a)(i) and 40(a)(ia) specifically relate to tax related items. Section 40(a)(ic) refers to a sum paid on account of fringe benefit tax. At the same time, Section 40(a)(iib) refers to royalty, licence fee, service fee, privilege fee or any other fee or charge. Hence,

“If these words are considered to include a tax or surcharge like sales tax, the distinction so carefully spelt out in Section 40 between a tax and a fee will be obliterated and rendered meaningless.”

Further, the Bench observed that gallonage fee, licence fee and shop rental (kist) were the levies under the Kerala Abkari Act on all the licence holders, as such it could not be said that same was an exclusive levy on the appellant/KSBC. Hence, the Bench expressed,

“Once the State Government Undertaking takes licence, the statutory levies referred above are on the Government undertaking because it is granted licences.”

Therefore, the Bench disagreed with the finding of the High Court holding that such finding was contrary to object and intention behind the legislation.

Findings and Conclusion

In the backdrop of above, the Bench concluded:

  1. Gallonage fee, licence fee and shop rental (kist) with respect to FL9 and FL1 licences granted to the appellant would squarely fall within the purview of Section 40(a)(iib).
  2. Surcharge on sales tax and turnover tax, is not a fee or charge coming within the scope of Section 40(a)(iib)(A) or 40(a)(iib)(B), as such same is not an amount which can be disallowed under the said provision and disallowance made in this regard was rightly set aside by the High Court.

Resultantly, assessments completed against the assessee for 2014-2015 and 2015-2016 were set aside and the Assessing Officer was directed to pass revised orders after computing the liability in accordance with the directions in this judgment.

[Kerala State Beverages Manufacturing & Marketing Corporation Ltd. v. CIT, 2022 SCC OnLine SC 3, decided on 03-01-2021]


*Judgment by: Justice R. Subhash Reddy


Appearance by:

For the Appellant: S. Ganesh, Senior Advocate

For the State: N. Venkataraman, Additional Solicitor General


Kamini Sharma, Editorial Assistant has put this report together 


 

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