EY Tax Alert. Executive summary. Supreme Court rules on scope of statutory dues allowable as deduction on actual payment.

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1 15 May 2015 EY Tax Alert Supreme Court rules on scope of statutory dues allowable as deduction on actual payment Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes a recent ruling of the Supreme Court (SC) in the case of Travancore Sugars & Chemicals Ltd. [1] (Taxpayer) on the issue whether provision for vend fees payable by the Taxpayer to State Government is allowable as deduction on actual payment basis pursuant to a specific provision in Indian Tax Laws (ITL) which permits deduction for tax, duty, cess or fee, by whatever name called, under any law for the time being in force on actual payment thereof. The Taxpayer, a company engaged in the manufacture and sale of sugar and liquor, was liable under a state law to collect from customers and pay vend fee to the State Government to be used for repairs/replacement of old machinery of the Taxpayer and two other sugar mills. The SC held that the vend fee compulsorily collected by the State Government was in the nature of a fee and hence covered within the scope of the provision. It further held that even if vend fee is not regarded as fee in the sense of recompense for a special service/benefit but is consideration paid for granting a privilege by parting with exclusive right of the Government, still, it would fall within the wide scope of the provision which covers fee, by whatever name called. Hence, it is allowable as deduction on actual payment only. [1] [Civil Appeal No Of 2005]

2 Facts and background The ITL contains a specific provision (viz. section 43B) which permits deduction, inter alia, for tax, duty, cess or fee, by whatever name called, under any law for the time being in force on actual payment thereof even for taxpayers following mercantile method of accounting. If the payment is made within the due date for furnishing return of income for the relevant tax year, the deduction is allowed in the same tax year. Else, the deduction is allowed in the year in which such sums are actually paid. Prior to amendment by Finance Act 1988 effective from tax year , section 43B, inter alia, covered tax or duty under any law. The Finance Act 1988 amended the section to substitute the expression with tax, duty, cess or fee, by whatever name called, under any law for the time being in force to clarify the applicability of the provision to cess or fees imposed by any statutory authority. Under the Indian Constitution, manufacture and sale of liquor is a state subject and the State Government is granted exclusive right to levy taxes on liquor. The state under its regulatory powers has the right to prohibit absolutely every form of activity in relation to intoxicants, its manufacture, storage, export, import, sale and possession in all their manifestations. All such rights are vested in the state. There is no fundamental right to do trade or business in intoxicants [2]. The Taxpayer is a company engaged in the manufacture and sale of sugar and liquor. The Taxpayer was liable under a state law (which covered the Taxpayer and two other sugar mills) to collect from customers and pay vend fee to the State Government to be used for repairs/ replacement of old machinery of the Taxpayer and the two other sugar mills. The vend fee was payable per bulk litre of liquor sold. During the relevant tax year , the Taxpayer provided for liability of vend fees but the same remained unpaid as at year end. Initially, the Taxpayer considered the sum as not admissible under section 43B in its return of income but subsequently put up claim that the liability was not covered within the scope of section 43B since it was not a compulsory exaction by law in the form of tax, duty, etc. but was a commercial consideration paid for grant of privilege. The Tax Authority did not accept the Taxpayer s claim and sustained disallowance made as per return of income. On further appeal by the Taxpayer, the First Appellate Authority ruled in Taxpayer s favour and allowed deduction of vend fees which was upheld by the Tribunal and the Kerala High Court (HC). The Kerala HC placed reliance on a Karnataka HC ruling in the case of CIT v. Sri Balaji and Co [3] (Sri Balaji ruling) in which the Karnataka HC held that amount paid to State Government in consideration of grant of lease/licence to manufacture liquor, although a statutory liability, is not covered within the scope of section 43B since it is not a compulsory exaction in the nature of tax or duty. It is a consideration received by the Government for granting privilege to the taxpayer by parting with Government s exclusive right to manufacture or sell intoxicants. Being aggrieved, the Tax Authority appealed further to the SC. Taxpayer s contentions The vend fee, in the present case, is payable under an arrangement between the Taxpayer and the State Government as per which machinery and equipment used by sugar mills which were very old and which required urgent repair / replacement could be so repaired or replaced. [2] CIT v. McDowell & Co. Ltd [(314 ITR 167)(SC)] [3] [(246 ITR 750)(Kar)]

3 Since the vend fee is not a compulsory exaction by the State Government in exercise of its sovereign right to levy and collect tax under law, it does not fall within the scope of expression tax, duty, cess or fee, by whatever name called, under any law for the time being in force and hence, cannot be disallowed under section 43B. Tax Authority s contentions The scope of expression tax, duty, cess or fee, by whatever name called, under any law for the time being in force is very wide. More particularly, by virtue of amendment made in 1988 by adding the words cess or fee by whatever name called, the expression covers any sums whether understood as fees in a general sense or as privilege upheld in certain judicial precedents. Taxpayer and other two mills for repair/replacement of old machinery. This shows that that the vend fees is, in fact, a fee in general sense of the term by way of a compulsory levy as recompense for a special service/benefit as elucidated by the SC in an earlier ruling in the case of Commissioner, Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt [4]. Even if the vend fee does not directly fall within the expression fee, it is a fee. by whatever name called as per amended law. Hence, even if the vend fee is actually a privilege as a consideration for parting with exclusive right of the Government, as held by the Kerala HC, the same would fall within the ambit of section 43B. The Kerala HC erroneously placed reliance on Sri Balaji ruling since the said ruling was concerned with tax year prior to amendment of section 43B in The ruling has no applicability to tax years post amendment. Hence, vend fees in the present case is covered within the scope of section 43B and allowable only on actual payment. SC ruling The SC ruled in favour of the Tax Authority and held that vend fees is covered within the scope of section 43B for the following reasons: The Kerala HC erred in not appreciating that Sri Balaji ruling pertained to tax year prior to amendment of section 43B in The present case pertains to tax year viz which is governed by amended law which refers to cess or fees by whatever name called. The Kerala HC did not take note of this aspect. [4] [1954 AIR 282, 1954 SCR 1005]. In this case, the SC observed that - A 'fee' is generally defined to be a charge for a special service rendered to individuals by some governmental agency..compulsion lies in the fact that payment is enforceable by law against a man in spite of his unwillingness or want of consent; and this element is present in taxes as well as in fees..the distinction between a tax and a fee lies primarily in the fact that a tax is levied as a part of a common burden, while a fee is a payment for a special benefit or privilege. Fees confer a special capacity, although the special advantage, as for example in the case of registration fees for documents or marriage licences, is secondary to the primary motive of regulation in the public interest. As per the scheme and object of levy of vend fees, it was to be used by the

4 Comments The present SC ruling (Two-Judge Bench) provides guidance that the whatever name called should be construed very widely to cover any sum if it is payable under a statute. As per SC, the expression fee may also cover fee which is collected for grant of a privilege. In the present case, the fund was collected so as to be eventually spent for repairs to be carried out by the Taxpayer and two other concerns. It is not very clear from the ruling whether the SC regarded this as a special benefit or privilege conferred on the Taxpayer or whether grant by the Government of exclusive right to carry on specified activity was considered as a privilege for which vend fee was collected. whatever name called includes only those levies which are in the nature of tax which a State levies in exercise of its sovereign power of taxation to raise revenue for the State. It would be interesting to see how the ratio of above referred two rulings which seemingly appear to be in conflict with each other is reconciled by courts. This would be of a particular significance to those taxpayers by whom licence fees are payable to Government for obtaining a right to carry on a specified activity. Incidentally, the present SC ruling does not take note of an earlier SC ruling in the case of CIT v. McDowell & Co. Ltd [5] (Two Judge Bench), where the SC had held that the whatever name called does not include within its scope, price or consideration charged by Government for grant of licence by parting with its exclusive privilege. Applying the well-known interpretation rule of ejusdem generis, the SC held that the [5] [(314 ITR 167)(SC)]

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