VAT Not Fee/Charge; Cannot Be Disallowed As Deduction Under Section 40(a)(iib) of Income Tax Act: ITAT

The bench of Mahavir Singh (Vice President) and Dr. Dipak P. Ripote (Accountant Member) held that since the power of the State Government to levy tax on sale and purchase of liquor and the power to levy fees are two different powers, which are derived from two different entries in the State list, the fees levied by the State under Entry 66, cannot encompass tax levied by virtue of Entry 54.

The assessee- M/s. Tamil Nadu State Marketing Corporation Ltd. (TASMAC), is a State-owned undertaking engaged in trading and retail vending of liquor.

The Principal Commissioner of Income Tax (PCIT) held that the VAT levied on the assessee by the State Government, fell within the ambit of Section 40(a)(iib) of the Income Tax Act. Accordingly, the PCIT passed a revision order, ruling that the assessment framed by the Assessing Officer (AO), allowing the VAT expenses claimed by the assessee as deduction, was erroneous and prejudicial to the interest of revenue. The PCIT directed the AO to reframe the assessment of the assessee.

Section 40 (a)(iib) of the Income Tax Act provides that any amount paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever called, which is levied exclusively on a State Government undertaking by the State Government, or which is appropriated, directly or indirectly, from a State Government undertaking by the State Government, shall not be deducted in computing the income chargeable under the head, "Profits and gains of business or profession".

Against the revision order passed by the PCIT, the assessee filed an appeal before the ITAT.

The assessee- Tamil Nadu State Marketing Corporation (TASMAC), submitted before the ITAT that it is a state undertaking, having the exclusive privilege to supply, by wholesale and retail, Indian Made Foreign Spirit (IMFS) across the State of Tamil Nadu.

The assessee contended that it retails alcoholic liquor through retail vending shops across the State of Tamil Nadu and collects from its customers the sale price of the liquor bottle, along with the Value Added Tax (VAT) as per Section 3(5) of the Tamil Nadu Value Added Tax Act, 2006 (TNVAT Act). The assessee added that it remits the VAT so collected to the State Government after filing the necessary return, as prescribed in the Tamil Nadu Value Added Tax Rules, 2007.

It argued that the VAT levied by the Government of Tamil Nadu is not in the nature of royalty, license fee, service fee or privilege fee, inter alia. Thus, it averred that the VAT levied on the assessee, did not fall within the provisions of Section 40(a)(iib) of the Income Tax Act.

The ITAT noted that the PCIT, in its revision order, had interpreted the word royalty, license fee, privilege fee, service charge or any other fee or charge, as specified in Section 40(a)(iib), as wide enough to include sales tax/VAT.

The Tribunal observed that the VAT is levied by the Government of Tamil Nadu under Entry No.54, List II of the Seventh Schedule of the Constitution of India. Further, the assessee pays the State Government VAT as per Section 3(5) of the TNVAT Act, which it claimed as an expenditure for the purpose of computation of income under the head "Profits and Gains of business or profession".

While holding that the State has the exclusive power to levy taxes on sale and purchase of intoxicating liquor under Entry 54 of List II, the ITAT noted that the state's power to levy fees in respect of the matters mentioned in List II is given under a different entry, i.e., Entry No 66.

Thus, the Tribunal laid down that since the power of the State Government to levy tax on sale and purchase of liquor and the power to levy fees are two different powers, which are derived from two different entries in the State list, the fees levied by the State under Entry 66, by whatever name, cannot encompass tax levied by virtue of Entry 54.

The Tribunal observed that the Supreme Court in Har Shankar versus Deputy Excise and Taxation Commissioner (1975) had clearly distinguished the definition of fee from tax. Further, referring to the decision of the Supreme Court in Om Prakash Agarwal versus Giri Raj Kishori & Ors. (1986), the Tribunal reiterated that the State Government cannot levy tax under the guise of fee.

"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", the ITAT ruled.

The Tribunal took into account that the assessee/TASMAC collected VAT from its customers, which was collected on behalf of the Government and passed on to the Government. However, it noted that the assessee cannot collect Privilege Fees/ Vend fees separately from its customers. The Tribunal added that VAT, which is separately collected from the customer/purchaser of liquor, is different and distinct from the charges mentioned in Section 40(a)(iib) of the Income Tax Act, which are borne by TASMAC and cannot be collected from the purchasers.

The ITAT further held that the payment of VAT is not an appropriation which can be brought within the ambit of Section 40 (a)(iib) of the Income Tax Act. It concluded that the VAT payable by the assessee to the State Government is neither in the nature of royalty, licence fee, service fee, privilege fee, service charge, or any other fee or charge, and nor is it levied exclusively on the assessee.

While holding that a trader can collect VAT as per the provisions of the TNVAT Act and nothing more, the ITAT ruled that the VAT collected and paid by TASMAC, under the provisions of TNVAT Act, is an allowable expenditure and cannot be disallowed under the amended provisions of Section 40(a)(iib) of the Income Tax Act.

"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", the ITAT said.

The Tribunal thus allowed the appeal and quashed the revision order passed by the PCIT.

Case Title: M/s. Tamil Nadu State Marketing Corporation Ltd. versus ACIT

Dated: 14.11.2022 (ITAT Chennai)

Representative for the Appellant: R. Vijayaraghavan, Advocate

Representative for the Respondent: M. Rajan, CIT

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