Income Tax Appellate Tribunal - Hyderabad
Ap Beverages Corporation Ltd.,, ... vs Assessee on 30 May, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA No. 693/HYD/2011
Assessment Year: 2006-07
AP Beverages Corporation Ltd.,, ... Appellant
Hyderabad.
(PAN - AABCA7385A)
Vs.
Income Tax Officer-Ward-1(1), ...Respondent
Ward - 8(3), Hyderabad
Appellant by : Shri K. Vasant Kumar
Respondent by : S/Shri V. Srinivas/YVST Sai
Date of Hearing : 30/05/2012
Date of Pronouncement : 30/07/2012
ORDER
PER ASHA VIJAYARAGHAVAN, J.M.:
This appeal is filed by the assessee directed against the order of CIT-I, Hyderabad dated 29/03/2011 passed u/s 263 of the Act, for the assessment year 2006-07.
2. The assessee has raised 11 grounds of appeal, the sum and substance is that the order passed by the CIT u/s 263 of the Act, is erroneous both on facts and in law.
3. The assessee is a state government corporation, which is engaged in the business of trading/retail vending in liquor. The State Government which has the power to regulate the distribution of liquor within the State under the Andhra Pradesh (Regulation of Tr ade in Indian Liquor, 2 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
Foreign Liquor) Act, 1993 has granted right to bottling and distribution of liquor to the assessee Corporation. The Government has been charging fees from the corporation u/s.23A of the Excise Act, which reads as under:-
"PAYMENT BY THE CORPORATION Sec.23A. In consideration of the privilege conferred on the Corporation, in terms of the Andhra Pradesh (Regulation of Trade in Indian Liquor, Foreign Liquor) Act, 1993, the entire margins Special Privilege Fee, any other receipts and any other amount realized by the Corporation from whatever source after deducting the expenses incurred by the Corporation, shall be paid as Privilege Fee or Special Privilege Fee or any other fee by whatever name called to the Commissioner of Prohibition & Excise in terms of Section 23(1) in the month succeeding the month of sale."
4. The AP Government has been notifying the amount payable by the assessee corporation by way of special privilege fee and assessee has claimed payment made by them to the AP Government as special privilege fee as a deduction in its return of income.
5. The Assessing officer had allowed the claim of the Assessee. The CIT exercising revisionary powers u/s 263 has disallowed the entire amount of privilege fee, Special privilege fee and special privilege fee in respect of sports amounting to Rs.883,90,15,513/- on the ground that payment of privilege fees and special privilege fee is nothing but payment of shares of profit to the AP Government and is not in the nature of business expenses.
6. It was submitted by the AR of the assessee before the CIT that the Government of AP has power in right to restrict, bottling and distribution of liquor within the State of AP. By 3 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
the power vested to them under the Act, they had granted exclusive privilege of bottling and distribution of liquor within the AP and for granting its right they have charged privilege fee, special privilege fee and special privilege fee for sports.
7. Further, it was submitted that Section 23A clearly lays down that the consideration of the privilege conferred on the Corporation, the margin special privilege fee, any other receipts and any other amount realized by the corporation from whatever source after deducting the expenses incurred by the corporation shall be paid as privilege fee or special privilege fee or any other fee by whatever name called. The Commissioner was of the view that the assessee has to pass on the entire sale consideration after deducting the expenses incurred by the corporation to the State Government. Therefore the Commissioner was of the opinion that it is a profit margin this is paid in the name of fee. The State Government by G O dated 22.02.2005 had directed the corporation to re-fix the margin after finalization of tender. The assessee contended before the CIT that whatever manner the amount is paid, what is paid as privilege fee is for the Government granting commercial right to the assessee corporation for carrying on its business of bottling and distribution of liquor. This would amount to grant of license for the purpose of carrying on business by the assessee and therefore any payment in whatever manner the amount paid would be allowable as a deduction. The assessee had alternate plea that the amount is statutorily payable to the AP Government and hence it goes by over riding of title and cannot be treated as income of the assessee at all.
4 ITA NO. 693/Hyd/2011AP Beverages Corporation Ltd.
8. The learned AR of the assessee also submitted that the Assessee has been claiming these fees as a deduction in the earlier years and there has been no disallowance is made in the earlier years. The AO in the course of assessment called upon the assessee to substantiate along with the documentary evidence that all payment claimed on privilege fee, special privilege fee and special privilege fees for sports.
9. According to the CIT this action of the AO was merely to consider whether there should be any disallowance under Section 43B and that he has not examined serious legal issue regarding the allowability of this payment.
10. The CIT mentions that even though all the particulars were available on record, he completed the assessment without examining the same. The Assessee further submits that the CIT issued three notices viz., 10.10.2005, 25.12.2005, 02.02.2006 for the assessment year 2002-03, wherein all the particulars regarding payment of privilege fee were discussed.
11. The CIT disallowed in computing book profit statutory liability for privilege fee all the years paid in that year.
12. Aggrieved by the order of the CIT, the assessee is in appeal before us.
13. Before us, the learned Departmental Representative argued vehemently that the order of the CIT has been well reasoned and should be sustained. The learned DR Shri V. 5 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
Srinivas filed written submissions and the contents of which are as under:
1. The claims of privilege fee, special privilege fee and sports fee ought to have been allowed u/s. 37 of the Income-tax Act, 1961).
2. The case of McDowells (SC) & Sri G. Suman (Ker) apply and whatever is paid is not 'fee' as such.
Reliance placed on Govind Saran Ganga Saran and other cases by the Department is not relevant according to assessee.
3. The word "expense" mentioned in Section 23A of Excise Act does not mean that income tax is to be deducted before remittance of fee to Government.
4. Accounting Standards-22 is not a statute but is only a guideline and hence, the word 'expense' in section 23A of A.P. Excise Act can ignore the provisions of Accounting Standards.
5. The argument of the appellant is that the expenditure is paid towards the 'Privilege Right' and hence, it should be allowed.
6. It is contended by the appellant that section 68A r.w.s. 23A of Excise Act shows that the income derived from the trade cannot be held to be belonging to the appellant and hence, the payment is by overriding title.
7. It is stated that the corporation is doing the business as an authority on behalf of the state and hence, Article 289 of the Constitution applies and the profits earned there-from are exempt from income tax. Section 23A and Article 289 are to be read together so as to exempt assessee from income tax
8. The appellant's counter given with respect to Karnataka Beverages Corporation is stated to be ignored in the order u/s. 263.
9. It is claimed that proprietor is the state and hence, the profit is given back to the state.
10. In summary the arguments of the Ld. Counsel contain serious contradictions, which are listed as below :
6 ITA NO. 693/Hyd/2011AP Beverages Corporation Ltd.
(a) APBCL is totally exempt as run by state government whereas it is again claimed that this is a distinct entity and it pays sales tax and other taxes. It also files income-tax returns declaring itself as a corporation and not as state government.
(b) Claim made that as an agent of state, not liable to income-tax and that it paid income-tax unnecessarily. Assessee is filing income-tax returns in contradiction to its claims of exemption. Once again claim is made that Article 289 and Schedule - VII exempts them.
(c) Section 23A is the basis of payment. Statutory liability paid according to A.P. Excise Act but again argument is made that the liability is not a statutory liability but claimed as expenditure u/s. 37.
(d) Whatever is paid as privilege fee is not fee or cess and it is a contractual payment not covered u/s 43B. However, in column 21 (i)(B)
(a) of 3CD annexure of tax audit reports u/s 44AB filed for different years, privilege fee is recognized as fee u/s 43B.
(e) Payment by overriding title is claimed while the actual affairs show that the receipts and expenditures are fully reflected in the own profit and loss account of the assessee. Sale receipts include this sum whereas claim is made that it is not their receipt.
(f) Website of the Corporation reads 'ploughing back of profits' as against the claim of assessee before tax authorities that the fee is an 'expenditure'. Section 23A states that it is margin paid after expenses.
(g) Accounting Standards and Company law are claimed to be not applicable. Whereas the accounts are audited and there is no qualification or remark made in the audit report to state that these laws are not applicable.
Points raised against order u/s. 263 :
1. It is claimed that the earlier Commissioner decided the issue in A.Y.2002-03 and there is no change in law since then.7 ITA NO. 693/Hyd/2011
AP Beverages Corporation Ltd.
2. It is claimed that precedent should have been followed because earlier CIT dropped the issue after examination. It is also stated that the Commissioner should have decided the issue on his own and not comment that the issue was not decided upon in the past by any appellate authority.
3. The date mentioned in the assessment order and the date mentioned in the acknowledgement given by the assessee for receiving the assessment order are contested by the appellant.
Department's Reply :
1. At the very outset, it is to be seen that the nature of payment is nothing but application of income rather than an expenditure incurred towards earning of income. The expenditure is not incurred either during the course of the business or for the purpose of earning the profits, but was only appropriated or distributed from out of the profits / margins earned.
The distinction between payment out of profits and a payment to earn the profit is unexceptionable. Even if the claim were to be considered u/s.37, the wording of section 23A and the computation according to section 23A of the Excise Act has to be followed. The word 'expense' used in the said section must be construed in the commercial sense and as per the Accounting Standards and Company Law etc. Since the word 'expenses' has not been defined in the Excise Act and in that sense is not subject to any restricted meaning, it should receive its natural, plain, or ordinary meaning. This, as held by the Supreme Court in Md. Ali Khan vs CWT, 224 ITR 672, 675 is a "cardinal principle of construction". In this context, therefore, the word expenditure has to be seen as any outgoing that has to be provided for before ascertainment of profit available for the enjoyment of the proprietor. This the position sanctified by AS 22. It is also reinforced by the fact that in sec 40(a)(ii) the Income Tax Act found it necessary to specifically exclude Income Tax from eligible expenses in the computation of Business Profits. But for such artificial exclusion, the Income tax paid could have been seen as an expenditure in its natural sense.
2. The basis of the claim was section 23A of the Excise Act, and it has been correctly interpreted by the Department. There is no other way of interpretation 8 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
of the word 'expense' that is finding a place in this section. Any other interpretation other than what is given by the department would mean that there would be a serious violation of other laws such as Company Law including Accounting Standards, Income-tax Act and judgments of Supreme Court.
3. If the interpretation given by the assessee were to be accepted, there would be no income arising in any year and the provisions of Income-tax Act would be made redundant which is not the intention of the State Legislature.
4. The State Legislature was fully aware of the case of APSRTC and other judgments of the Apex Court wherein it was held that company/corporation is not exempt as per Article 289 of the Constitution. This fact cannot be ignored.
5. The conduct of the Corporation shows that it was filing returns of income and paying income tax on the disallowables or on prior period adjustments etc., which means that it was not convinced of its own arguments regarding its exemption under Article 289 of the Constitution.
6. The Corporation is paying sales tax and other duties to the State Government, thereby recognizing itself as an independent entity. The assessee is not taking a consistent stand with regard to privilege fee
- statutory fee. The records show that in the tax audit report u/s. 44AB, privilege fee etc., is treated as a liability disallowable or allowable u/s. 43B by the assessee itself. This is contrary to the arguments made by the Ld. AR.
7. The question of admissibility of the impugned expenditure was considered only u/s.37 of the Income-tax Act. Given the provisions of section 37 it can clearly be seen that these sums paid are not for the purpose of earning income. Reliance is placed on case laws referred to in the cases of Poona Electric Supply Co. Ltd. (SC - TC13R.287 decided on 19.04.65) & Pondicherry Railway Co. Ltd. Vs. CIT (AIR 1931 PC).
8. In fact to allow any expenditure u/s. 37 one has to go into the purpose, basis, quantification, reasonableness, whether it is personal in nature or not, whether the expenditure is capital in nature or not etc. When we apply these criteria we go back to 9 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
section 23A of Excise Act which is the basis of the claim and accordingly all the arguments of interpretation of section 23A spring back to life and the expenditure is to be disallowed. The concept of 'fee' and the judgments of the Supreme Court also come back to life and hence, assessee's arguments are not acceptable.
9. Even if it were to be considered otherwise it can clearly be seen that this is a case of application of profit as the total margin is given away and accordingly case laws referred to by the department apply and this is a case of application of income.
10. Even otherwise, if all the arguments / provisions are ignored for a minute and we examine the question i.e., profit being given back for obtaining the right of 'privilege to trade in liquor', it can be seen that the expenditure is capital in nature and hence, the judgment of Supreme Court in the cases of Jalan Trading Company and Vibhuti Glass Works would squarely apply and the same is to be disallowed even on this count.
11. Accounting Standards is part of Company law and the same is to be recognized. Even for the purpose of income-tax the provisions of Accounting Standards and the Company Act cannot be ignored.
12. Accounting Standards are binding on the company and hence, the same cannot be ignored. Copy of Accounting Standards, (year 2001) showing the mandatory provisions of AS-22 were submitted. Section 23A cannot be ignored and the words contained therein cannot be interpreted in any other manner so as to make the other laws and provisions redundant.
13. After giving proper opportunity and taking into consideration all the submissions and case laws an elaborate order u/s. 263 has been passed by the CIT. It cannot be said that there is no application of mind. The principle of res judicata does not apply to income-tax proceedings. Even otherwise the objection of the assessee that the matter was decided upon by the CIT for earlier year 2002-03 was unsubstantiated and unproved, the AR failed to point out any such finding of the CIT though records were fully made available to him for study. Further, it was pointed out to counter the argument of the AR 10 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
that there was no judicial precedent in this case by way of any decision of appellate authority on this issue. Irrespective of these arguments it may clearly be seen that a well reasoned order has been passed by the CIT. Objections against action u/s. 263 are dealt with at length in para - 8 of the order u/s. 263.
14. Reliance is placed on Windwell Securities Ltd [2011- TIOL-141-ITAT-MUM], Apollo Hospitals Enterprises Ltd [2008-TIOL-211-HC-MAD-IT] and in the case of Namdhari Seeds [2011-TIOL-876-HC-KAR-IT].
15. It is well established from the records that the assessment order was passed on 30.10.2008 without taking into consideration the material submitted by the assessee on 20.11.2008. The assessment order was duly served on assessee on 03.11.2008. Reliance is placed on K.U. Srinivasa Rao Vs. CWT (152 ITR 128, A.P) to state that "the order must be deemed to have been made on that date on which it purports to have been made." The suggestion that they might have been antedated is a baseless allegation which deserves to be ignored.
16. About the reference made to the G.O. of Karnataka Beverages Corporation Ltd, copy of the GO was provided to the assessee during the revision proceedings, only to highlight that the 'fee' levied was a determinate amount. During the proceedings, the assessee did not address this issue but filed only a general reply.
17. The intention of the State Government was to take away the profit from trading in liquor as 'privilege fee' or 'by any other name called'. This is very clear in the scheme of things adopted and the language of section 23A of the Excise Act and the self declaration on the website.
18. Immediately after the department noticed the declaration on the website and the order u/s. 263 was passed, this disclosure was deleted from the website on the specious plea of resolving technical problems.
19. Reality of the situation is that whenever margins were increased such increased amounts were asked to be paid to the State Govt (read proprietor) in the name of privilege fee or by any other name. The manner of computation itself evidences this fact that 11 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
it was the profit that was being taken. This was the truth recognized on the website, which upon turning inconvenient in the light of proceedings u/s 263, had to be removed.
20. The mechanism of conducting the business is not crucial to determination of income. The payments may be made in treasury or collected by the assessee and paid in the treasury. This does not alter the character of receipt or the expenditure, given the fact that assessee is a Corporation.
21. The legal position also shows that all the statutory provisions have been made so as to take the profit 'after allowing the expenses' i.e., including the income-tax that is to be computed and paid to Central Government. By way of an analogy, it can be said that the Corporation did not want merely 7% or 10% of the sales as privilege fee but wanted, say 70% of the profit and hence, legislated accordingly. It cannot be interpreted to state that it wanted to take the profit of 100% without payment of income- tax. Hence, the word 'expense' was incorporated in section 23A by the State Legislature. The arguments of the Counsel that if income tax is paid nothing is left to be paid as privilege fee to the State is not true as 70% of the profit is still available to be paid to State Government.
22. Once 'real profit' is computed, no other expenditure is to be allowed. This is the ultimate stage and charge of income tax arises first before such profit is given back to the state government. It cannot be denied that 'real profit' is computed in this case. Reliance is placed on the judgments of the Supreme Court filed. (Poona Electric Supply Co. Ltd. & Pondicherry Railway Co. Ltd.).
23. The claim of the assessee that he will pay away the 'real profit' and show the income as nil would mean violation of other laws and misinterpretation of its own section 23A of the Excise Act.
24. In the fitness of things it can clearly be seen that what is paid is the resultant profit in the name of privilege fee or by any other name called. To the extent profit is sought to be paid it amounts to application of income irrespective of all other considerations / arguments. Once 'Real Profit is computed no expenditure can be allowed further as 12 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
deduction. It amounts to only appropriation of income. Even if it were to be regarded as other than 'fee' the deduction cannot be allowed u/s. 37 as the expenditure is not made to earn the income nor is it quantifiable nor justifiable as per provisions laid down in section 23A of the Excise Act & section 37 of the Income-tax Act, 1961 and the payment made is only ploughing back of profit.
25. Given the claim made u/s. 23A of the Excise Act there is necessity to allow this expenditure only after payment of income-tax.
26. The word 'expense' used in the Excise Act and the provisions of Accounting Standards and Company Law are all to be read together hence, the claim cannot be allowed under Excise Act unless income- tax is first deducted.
27. If the word 'fee' is to be considered as per the case laws the conditions laid down by the Supreme Court are not fulfilled so as to allow the same. If it were to be considered as 'fee' also, it is to be disallowed and rather allowed after deduction of income tax.
28. Ignoring for a minute all the other provisions and arguments, even if we were to consider favourably the arguments of the assessee, the payments made are for a 'capital right' and therefore, the expenditure is a capital expenditure and hence, to be disallowed as per the judgments of Supreme Court (Jalan Trading Company and Vibhuti Glass Works) submitted hereinabove.
29. For elaborate reasons mentioned in paragraphs 7.17 to 7.22 on pages 10-13 of the order u/s.263 the argument of the assessee that the payment was made by overriding title is not tenable. The consideration was part of the sale receipt. According to its own P&L Account both the receipts and the expenditure are forming part of this account and hence payment by overriding title does not arise. Case laws applicable to the facts of the case on this aspect are referred to in the order u/s. 263 and also separately filed.
The above written submissions may be considered along with the arguments made and the case laws submitted in paper book.
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14. On the other hand, the learned counsel for the assessee Shri Vasant Kumar submitted that the order of the CIT under Section 263 is to be quashed on the ground that jurisdiction under Section 263 was sought to be exercised based on change of opinion. Hence in the light of the decision of the Apex Court in the case of Mallabar Industries Ltd reported in 243 ITR 83, it was contended that the order of CIT requires to be cancelled. More so, because the department was aware of the characteristic of the payment of special privilege fee, additional privilege fee etc.
15. The learned counsel for the assessee contended before us that It is not in dispute that the Government of AP had granted license to the assessee corporation for carrying out bottling and distribution of liquor within the State of Andhra Pradesh. Section 23A of the Act grants the AP Government charged privilege fee, special privilege fee, or any other fees by whatever manner called, the entire margin special privilege fee, any other receipts and any other amount realized by the Corporation. From the Act it is clear that what is charged by the AP Government is fee in exchange for granting exclusive right of bottling and distribution of liquor in the State of AP to the assessee. This fee permits the assessee to carry on business and realize profit. Further this fee is payable on the sale made by the assessee corporation. It is therefore clear what is charged by the AP government is fee for permitting the assessee to carry on business. This being so, it clearly fell in the revenue field and the same should be allowed as a deduction in computing the business profit of the assessee corporation.
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16. The learned counsel for the assessee relied upon the decision of the Apex Court in the case of CIT Vs Mcdowell and Co ltd (No.1) reported in 314 ITR 167 wherein it has been held as under;-
"it was the duty of the Revenue authorities to ascertain whether the deduction which was to be tested on the touchstone of Section 43B(a) was an amount payable by way of tax or duty or fee or cess. The bottling fee for acquiring a right of bottling IMFL, which was determined under the Rajasthan Excise Act, 1950 and rule 69 of the Rajasthan Excise Rules 1962 was payable by the assessee as consideration for acquiring an exclusive privilege. It was neither fee or tax but the consideration for grant of approval by the Government as terms of contract in exercise of its right to enter into a contract in respect of the exclusive right to deal in bottling liquor in all its manifestations. The High Court was right in holding that the amount did not fall within the purview of Section 43B."
The requirement of Section 43B is actual payment and not deemed payment as a condition precedent for making the claim for deduction in respect of any expenditure incurred by the assessee during he relevant previous year specified in Section 43B. The furnishing of bank guarantee cannot be equated with actual payment which requires that money must flow from he assessee to the public exchequer as required under Section 43B. By no stretch of imagination can furnishing of bank guarantee be actual payment of the tax due in cash"
17. It was argued by the learned counsel that what was before the Apex Court was whether the fee for the grant of the right of bottling and distribution under the Excise Act and Rules payable by the assessee would not constitute tax, duties, cess or fees for the purpose of Section 43B. The Apex Court had held that such bottling fee paid by the assessee is allowable on accrual basis and will not attract the provisions of sec 43B. The issue was not one of 15 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
allowability: but whether the amount is allowable on accrual or allowable only on actual payment u/s 43B. In fact Section 43B starts is applicable to amounts which are otherwise deductible under the Income tax Act. Therefore if the amount of privilege fee is not allowable as a deduction at all, the question of considering whether such amount will attract the provisions of Section 43B would not arise at all.
18. The learned counsel for the assessee further relied on the decision of Jaipur Tribunal in the case of Rajasthan State Beverages Corporation Limited in ITA No 540 & 545/JP/2011, wherein the Tribunal held in para 13 of their order as under:-
"13. The ld.CIT(A) has followed the order of his predecessor and such decision has been confirmed by the Tribunal vide order No. 901/JP/2009 dated 20.08.2010. The ld.CIT(A) has reproduced the observation of the Tribunal as under:-
"We have already decided the appeal in the case of Rajasthan State Ganganagar Sugar Mills and have held that the privilege fee paid by the assessee is allowable as a business expenditure.
The fee was paid for granting right to manufacture and vend he liquor which is exclusively domain of the State. Determination of privilege fee at any reasonable amount was within the jurisdiction of State Authorities ie., Excise Department and levy fee cannot be termed as application of income or dividend. This is purely a business expenditure and has to be allowed in view of the provisions of Section 37(1) of the Act. The AO has made an objection that privilege fee was not paid against any agreement entered between assessee company and the Government of Rajasthan. It is not necessary that any fee is to be paid under any MoU. The assessee company in which the main stake holders are Government of Rajasthan, was allowed to manufacture and vend liquor after fixing the privilege fee which was agreed by the 16 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
assessee and was paid accordingly. Firstly it was levied on an excess amount, thereafter on representation of assessee company it was reduced to Rs.12.50 crores and the same was paid by the assessee to start its business activity. It is further seen that the privilege fee was compulsory to start the business activity. In our considered view, the levy of privilege fee is like license fee to start the business, otherwise the assessee could not have started the manufacturing and vend he liquor. The assessee has earned a huge profit even after paying this privilege fee as the return filed by the assessee was of Rs.4.98 crores or so.
The department has raised an objection that the Excise Commissioner is also the Director of the assessee company. Therefore, this is a well planned activity and has to be treated as application of money. In our considered view, this objection of the department is also not tenable for the simple reason, this objection of the department is also not tenable for the simple reason that any authority under any Act can be deputed as a Director or in any other capacity by the Government to look after the business activity. The fee is not levied by the Excise Commissioner but is levied on behalf of the Excise Department, Excise Department is not a shareholder in the assessee company as the shareholder is the Rajasthan Government. Therefore, this objection of the department also does not hold good. The ld.DR has also stated that fee paid by the assessee is in contravention of Section 29 of the Excise Act is not the issue here. The issue is whether the fee paid is for the purpose of business or not. If it is in contravention of provisions of Excise Act, the Excise Authority will take appropriate action, but if the same is paid for business purpose, then the payment cannot be held as in genuine or held as not allowable in view of the provisions of Section 37(1) of the Act, It is further seen that even there is no contravention in paying the privilege fee as the fee is paid under Section 24 of the Excise and the provisions of Section 28, 29 are not applicable as they are on separate aspect.17 ITA NO. 693/Hyd/2011
AP Beverages Corporation Ltd.
We have gone through the other case laws, relied upon by ld.A R and found that they also support the case of the assessee. In view of the above facts and circumstances, we held that privilege fee paid by the assessee is allowable as business expenditure. Accordingly we direct the AO to allow the deduction to the assessee. Since the facts are identical therefore following the precedent, we confirm the order of the ld.CIT(A) here in the present case also."
14. The ld.CIT(A) after considering the above observation deleted the addition after observing as under:-
"In the present case, the appellant company was granted exclusive privilege for wholesale trade of Indian made Foreign Liquor & Beer in the State of Rajasthan for financial year 2006-07 under the provisions of the Rajasthan Excise Act, 1950 by competent authority under the said Act. In exercise of its power under Section 30 and 42(c0 of the Rajasthan Excise Act, 1950 the competent authority under the said Act has levied a privilege fee of Rs.15 crores for FY 2006=-07 vide its order No.F.4(5)FD/Ex/2005 dated 28.03.2007 upon the appellant company in lieu of granting the said privilege. In view of these facts and following the order of the Hon'ble Tribunal, Jaipur for AY 2006- 07, I direct the AO to delete the addition of Rs.15 crores. This grounds of appeal is allowed.
15. The After hearing both the parties, we feel that issue before us stands covered by the order of the Tribunal in the case of the assessee for earlier years and hence we decline to interfere in the finding of the CIT(A).
19. The learned counsel for the assessee also relied on the decision in the case of Tamilnadu State Corporation Ltd Vs DCIT reported in 42 ITD 349, the Chennai Tribunal had held that vending fee and additional vending fee (which are similar to privilege fee and special privilege fee) payable by the assessee corporation is allowable by observing as under:
18 ITA NO. 693/Hyd/2011AP Beverages Corporation Ltd.
"the sale vend fee and additional vend fee were nothing but the price or consideration charged by the State government in its capacity as a trade for parting with one of its valuable rights and privileges, namely the right and privilege of supplying, by wholesale, Indian made foreign liquor throughtout the State of Tamilnadu. Such fee are directly relatable to the executive power of the State to carry on any trade under article 298 of the Constitution. This being the essence of the matter, irrespective of the mode and mechanics of collection of the fees, irrespective of the quantum of the fees levied, and irrespective also of the fact that the provisions relating to the levy are contained in the Prohibition Act and Rules made thereunder, the fees in question could not be regarded either as fees within the meaning of entry 66 of the State List or as a duty within the meaning of entry 51A of the State List, or as a tax proper.
If, as demonstrated above, the vend fee and the additional vend fee in question are the price paid by the assessee corporation to the State Government for acquiring from the State Government at the exclusive right and privilege in question, then the fact that these were levied and collected under the Prohibition Act along with excise duty, or the fact that the magnitude of the levy is disproportionate to the services rendered, or the compulsory nature of the levy or even the fact that the incidence of the levy was on the ultimate consumers as in the case of excise duty on liquor - considerations which weighted with the lower authorities - do not alter the nature of levy. The levy remains what is essentially is namely the price paid in a purely commercial transaction to the State Government for parting with its valuable rights and privileges relating to intoxicating liquors.
20. The learned counsel for the assessee submitted that from the said decision, it is clear that the amount paid by the assessee corporation for the rights granted to dealing in liquor can only be of revenue nature and the same should be deducted from the profit of the assessee corporation.
19 ITA NO. 693/Hyd/2011AP Beverages Corporation Ltd.
21. The learned counsel for the assessee further submitted that the other factor which had impact on the decision of the CIT, is that privilege fee is based on the profit made by the assessee corporation and hence cannot be claimed as expenditure. Once the payment has been held to be revenue expenditure, method of quantification could not affect the characteristic of such expenses. This was the expenditure incurred solely for the purpose of profit and gains and hence even though it is paid in relation to profit made in the business the same is an allowable deduction.
22. Originally, the case was posted for hearing on 10/02/12 and later the case was adjourned to 19/04/12 as part heard. Subsequently, the case was adjourned to 07/05/2012 and later to 10/05/2012 as the DR had requested permission to file written submissions. Again the case was adjourned from 25/05/2012 as part heard and the final hearing was completed on 30/05/2012.
23. The learned DR Shri V. Srinivas invited our attention to the latest amendments passed by the Andhra Pradesh Legislature on 16-04-2012), which have a direct impact for the case on hand. The learned DR filed written submissions, which are as under:-
"Clause 2 of the said Act inserts sections 4A, 4B and 4C in the AP (Regulation of Trade in IMFL, Foreign Liquor) Act, 1993 with retrospective effect from 21- 07-1993. The said Act also repeals sections 23A and 23B of AP Excise Act from a date to be notified by the State Government. The AR surprisingly stated that they have no further arguments to make in the present proceedings though these latest amendments are taken as grounds in certain other proceedings. In 20 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
order to render full justice to the case, there is necessity to consider these amendments also.
2. It is submitted that the above amendments are of wide import and have deep bearing on the present proceedings. It has been argued by the learned Counsel of the assessee in the present proceedings that the obligation of the assessee to pay privilege fee is only contractual in nature. However, the present amendments indicate that such obligation is not contractual simpliciter. In view of these latest amendments, the decisions in the cases of McDowells Ltd (314 ITR 167) and TASMAC Ltd. (42 ITD 349) are no longer applicable to the case of the assessee.
3. It is submitted that the present amendment to the AP (Regulation of trade in IMFL, Foreign Liquor) Act vindicates the stand of the Department and clearly establishes that the proceedings u/s 263 were validly initiated. All the arguments of the assessee made till now are devoid of merit in light of the new amendment which, retrospectively, treats the payments in a totally new context which was not subject matter of examination in the original proceedings. Therefore, on this point alone, the appeal is devoid of merits.
4. As per the new section 4C of the AP (Regulation of trade in IMFL, Foreign Liquor) Act, the payments made by the assessee as privilege fee, special privilege fee etc., as per provisions of section 23(1), 23A and 23B of AP Excise Act shall be deemed to be and always deemed to have been the income of Government and due payment for the relevant years in terms of section 4B. This clearly shows that the payment is nothing but appropriation of income. The issue that needs determination in this context is whether the State Government has an overriding title on such amounts. Section 4C only states that the amount paid is income of Government i.e in the hands of the recipient. For the purpose of taxation, the nature of payment in the hands of recipient is not material and the nature in the hands of the payer assessee is important. As per detailed submissions already made by the Department, the manner of computation of such payments clearly establishes the fact that income of the assessee corporation is passed on to the State Government. In such a case, it is obligatory on the part of the assessee 21 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
to pay income tax on the appropriation of profits and then remit the balance amount.
5. The argument of the assessee that the income of the corporation is income of the state and hence not liable to tax, is not tenable in law. This argument is amply rebutted with supporting case laws in pages 26 to 32 of the order u/s 263 of the CIT (paras 9.20 to 9.28), wherein detailed discussion is available on the applicability of Article 289 of the Constitution to the case of the assessee. It is submitted that the distinction between the Corporation and State is well recognized by the Hon'ble Supreme Court in the case of APSRTC Ltd (52 ITR 524, in particular at pages 531 to
533) and in other cases cited in the said paragraphs of the order of CIT. The income of the assessee Corporation can not be equated to that of the State.
This position has been followed by the Hon'ble AP High Court in the case of AP Civil Supplies Corporation Ltd. The relevant portion of the judgment of Hon'ble Supreme Court in the case of APSRTC Ltd is quoted below for the kind consideration of Hon'ble ITAT.
"If a trade or business is carried on by the State departmentally and income is derived from it, there would be no difficulty in holding that the said income is the income of the State. If a trade or business is carried on by a State through its agents appointed exclusively for that purpose, and the agents carry it on entirely on behalf of the State and not on their own account, there would be no difficulty in holding that the income made from such trade or business is the income of the State. But difficulties arise when we are dealing with trade or business carried on by a corporation established by a State by issuing a notification under the relevant provisions of the Act. The corporation, though statutory, has a personality of its own and this personality is distinct from that of the State or other share-holders. It cannot be said that a shareholder owns the property of the corporation or carries on the business with which the corporation is concerned. The doctrine that a corporation has a separate legal entity of its own is so firmly rooted in our notions derived from common law that it is hardly necessary to deal with it elaborately ; and so, prima facie, the income derived by the appellant from its trading activity 22 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
cannot be claimed by the State which is one of the shareholders of the corporation.
It may be that the statute under which a notification has been issued constituting the appellant corporation may provide expressly or by necessary implication that the income derived by the corporation from its trading activity would be the income of the State. The doctrine of the separate entity or personality of the corporation is always subject to the exceptions which statutes may create, and if there is a statutory provision which clearly indicates that despite the concept of the separate personality of the corporation, the trade carried on by it belongs to the shareholders who brought the corporation into existence and the income received from the said trade likewise belongs to them, that would be another matter. It would then be possible to hold that as a result of the specific statutory provisions the income received from the trade carried on by the corporation belongs to the shareholders who have constituted the said corporation, and so, we must look to the Act to determine whether the income in the present case can be said to be the income of the State of Andhra Pradesh.
In this connection, we may usefully refer to the observations made by Lord Denning in Tamlin v. Hannaford (1) : " In the eye of the law, " said Lord Denning, " the corporation is its own master and is answerable as fully as any other person or corporation. It is not the Crown and has none of the immunities or privileges of the Crown. Its servants are not civil servants, and its property is not Crown property. It is as much bound by Acts of Parliament as any other subject of the King. It is, of course, a public authority and its purposes, no doubt, are public purposes, but it is not a government department nor do its powers fall within the province of government. " These observations tend to show that a trading activity carried on by the corporation is not a trading activity carried on by the State departmentally, nor is it a trading activity carried on by a State through its agents appointed in that behalf. Emphasis supplied.
6. It is submitted that careful examination of the above decision reveals the following findings :23 ITA NO. 693/Hyd/2011
AP Beverages Corporation Ltd.
i) A corporation has a personality that is distinct from the State and hence normally income of a Corporation cannot be treated as income of State;
ii) The corporation is its own master and is answerable as fully as any other person or corporation.
It is not the Crown and has none of the immunities or privileges of the Crown. Its servants are not civil servants, and its property is not Crown property. It is as much bound by Acts of Parliament as any other subject of the King.
iii) A corporation (constituted through a State Act) is of course a public authority and its purposes, no doubt, are public purposes, but it is not a government department nor do its powers fall within the province of government.
iv) Trading activity carried on by the corporation is not a trading activity carried on by the State departmentally, nor is it a trading activity carried on by a State through its agents appointed in that behalf.
v) State may issue a notification under the Statute under which the Corporation is constituted, providing expressly or by necessary implication that the income derived by the corporation from its trading activity would be the income of the State.
7. Application of the above principles to the case of the assessee reveals the following features:
i) The assessee has distinct personality from the State which is evident from its Constitution as a company; the fact that accounts of the assessee are different from that of the State; the assessee is conducting trading on its own and showing receipts and expenditure on its own account; the entire activity of trading in liquor is subject to tax audit by the assessee; and the assessee is donating part of its income to State and claiming 80G deduction separately. Also, State has not indemnified the assessee for any of its acts or omissions or commission.24 ITA NO. 693/Hyd/2011
AP Beverages Corporation Ltd.
ii) The assessee is paying Sales Tax and Property tax to the State. The argument that Sales tax is collected from the retailers is devoid of merit because State Government or its own Department do not act as dealers for Sales Tax. A dealer is an independent entity and obeys by Sales Tax Law. This shows that the assessee is subject to the laws of the Sate as any other subject, which would not be the case, if it were the King.
iii) There is no notification or statutory provision expressly treating the income of the Corporation as that of the State. Section 4C now introduced, only states that certain payments made by the Corporation are deemed as income of the State Government and this does not extend to the entire income of the assessee. For instance, for the present year, the payments cover only part of the income and the balance amount of the profit is remitted as donation on which deduction u/s 80G is claimed by the assessee.
iv) The case is also not covered under Article 289(3) because trading in liquor is not declared by Parliament as an activity incidental to the ordinary functions of the Government.
v) From the above, it is clear that the income of the assessee is not that of the State and hence, it is liable to tax.
8. It is also submitted that the Hon'ble AP High Court examined the issue in detail in the case of AP State Civil Supplies Corporation Ltd (149 ITR 497) and found that there are five tests (as summarized by Justice Krishna Iyer in the case of Som Prakash Rekhi v. Union of India [1981] 51 Comp Case 71; AIR 1981 SC). The same are listed as follows:
"1. One thing is clear that if the entire share capital of the Corporation is held by Government, it would go a long way towards indicating that the Corporation is an instrumentality or agency of Government.
2. Existence of deep and pervasive State control may afford an indication that the Corporation is a State agency or instrumentality.25 ITA NO. 693/Hyd/2011
AP Beverages Corporation Ltd.
3. It may also be a relevant factor..... whether the Corporation enjoys monopoly status which is State conferred or State protected.
4. If the functions of the Corporation are of public importance and closely related to governmental functions, it would be a relevant factor on classifying the Corporation as an instrumentality or agency of Government.
5. Specifically, if a department of Government is transferred to a corporation, it would be a strong factor supportive of the inference of the Corporation being an instrumentality or agency of Government"
9. The Hon'ble AP High Court found that the Corporation was meeting all the tests to be termed as instrumentality of the State. Even in such case, the High Court decided that an instrumentality is different from the State and its income cannot be equated to that of State. Relevant portion of the decision is quoted below:
"An agency or instrumentality of a State is an entity different from the State itself. Agency or instrumentality of a State is an entity different from the State itself. Agency implies that there is a principal. Instrumentality implies that there is some other authority which uses this person as an instrument through which it acts. There is a clear distinction between the principal and the agent and the State and its instrumentality. For securing the fundamental rights to every citizen, the founding fathers thought it necessary to ensure that the State does not trample upon these rights guaranteed by the Constitution by resorting to the establishment of agencies or instrumentalities of State and enunciated a wide and comprehensive definition of "State" for the purpose of Part III of the Constitution.
Under the I.T. Act, a "company" as defined in s. 2(17), inter alia, includes any Indian company, any body corporate incorporated by or under the laws of a country and any institution, association or body whether incorporated or not. A State undertaking incorporated under the Companies Act is not outside the definition of a "company." "Person" defined under 26 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
s. 2(31) includes a "company." Income derived by any "person" is liable to charge of income tax under s. 4 as laid down under the several provisions of the Act. The I.T. Act as such does not excluded the income of a "company", which is a "person" within the meaning of s. 2(31) read with s. 2(17) from liability of tax. The exemption is claimed by the petitioner-company not under any provision of the I.T. Act, but only under art. 289(1) of the Constitution of India, which reads thus "298(1). The property and income of a State shall be exempt from Union taxation."
What is exempt from taxation is the income of a State and not the income of the instrumentality or agency of a State. That the income of this company is not the income of the State is clear even from art. 6 of the articles of association of the petitioner-company. It reads thus :
"6. No part of the funds of the company shall be employed in the purchase of or in loans the security of the companys shares. All income of the company shall belong to the Price Equalisation/Stabilisation Fund, Department of Civil Supplies, Government of Andhra Pradesh."
If the income of the company were to be the income of the State itself, there was no necessity for such an article. Only because the income of the company is different from the income of the State, a specific provision is made declaring that it shall belong to the Price Equalisation/Stabilisation Fund, Department of Civil Supplies, Government of Andhra Pradesh. Once it is the income of the company under the provisions of the I.T. Act, it is liable to tax and out of the gross income, after making allowance for such deductible expenditure as is permitted under the I.T. Act, the net amount shall be the income of the company. It is this income that is stated to belong to the Price Equalisation/Stabilisation Fund under the Department of Civil Supplies, Government of Andhra Pradesh. The fact that this amount is said to belong to the Price Equalisation/Stabilisation Fund, Department of Civil Supplies, does not establish that it is the income of the Department. The income of the company being distinct from the income of the State, immunity from taxation 27 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
provided under art. 289(1) of the Constitution is not attracted". Emphasis supplied
10. It is also submitted that in light of the above, it is clear that income of the assessee Corporation is distinct from that of the State. If section 4C is interpreted to the contrary, to mean that income of the Corporation is that of the State, that would imply that legislation is passed by a State on a subject on which Centre alone is competent to legislate (that is on Income Tax matters/exempting an assessee from income-tax). In such a case, there is repugnancy between the State legislation and Central legislation and as per Article 254 of the Constitution, the Central legislation shall prevail and the State legislation shall be treated as Void to the extent of the repugnancy. Even if it were to be argued that the State is competent to make laws on regulation of trade in liquor, as per Article 251, the State law is bound to fail when there is repugnancy with Central Law. As a result, section 4C is bound to fail. Once, section 4C fails and the manner of computation as prescribed u/s 23A of the AP State Excise Act is non-existent due to omission of section 23A, the amounts have to be treated as nothing but appropriation of profit. Relevant portions of Article 254 and Article 251 are quoted below for the kind perusal of Hon'ble ITAT.
"254. (1) If any provision of a law made by the Legislature of a State is repugnant to any provision of a law made by Parliament which Parliament is competent to enact, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of clause (2), the law made by Parliament, whether passed before or after the law made by the Legislature of such State, or, as the case may be, the existing law, shall prevail and the law made by the Legislature of the State shall, to the extent of the repugnancy, be void".
"251. Nothing in articles 249 and 250 shall restrict the power of the legislature of a State to make any law which under this Constitution it has power to make, but if any provision of a law made by the Legislature of a State is repugnant to any provision of a law made by Parliament which Parliament has under either of the said articles power to make, the law made by 28 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
Parliament, whether passed before or after the law made by the Legislature of the State, shall prevail, and the law made by the Legislature of the State shall to the extent of the repugnancy, but so long only as the law made by Parliament continues to have effect, be inoperative".
11. This position has been upheld by Justice Devi Prasad Singh of the Hon'ble Allahabad High Court in the case of UP Jal Nigam Ltd (202 Taxman 285). Relevant portion of the decision is reproduced below:
"71. One other aspect of the matter requires consideration. The Income Tax Act, 1961, has been legislated by the Union of India in pursuance of powers conferred by Article 246 of the Constitution read with Entry 82 List 1 of Schedule VII of the Constitution. Under Entry 82, the Union of India has right to legislate the law for taxes in income other than agricultural income, whereas, the State has got power to impose tax on agriculture income under Entry 46 List II of Schedule VII of the Constitution.
72. Applying the aforesaid principle, the State Government cannot exercise power to an item meant for the Central Government. The local authority should be defined keeping in view the provisions contained in Part IX and IXA of the Constitution and Section 10 (20) of the Income Tax Act read with Chapter-III of the Income Tax Act, 1961. Merely because the State legislature has used the word, local authority in sub-section (3) of Section 3 of the 1975 Act, it shall not entitled the U.P. Jal Nigam to claim exemption unless Income Tax Act itself provide.
REPUGNANCY
73. In view of the Article 254 of the Constitution to the extent of repugnancy, the Central Act shall prevail and the provision contained in Section 10 (20) of the Income Tax Act 1961, shall prevail over and above the U.P. Water Supply and Sewerage Act, 1975. The provisions of the 1975 Act may not be construed in the manner which may make the provisions contained in the Income Tax Act, redundant or expanded. Even by applying the principle of pith and substance the provisions contained in 1975 Act shall not make the 29 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
U.P. Jal Nigam a "local authority" under Section 10 (20) of the Income Tax Act 1961".
12. As already referred above, the newly inserted section 4C only reaffirms the fact that it is the profit that is sought to be appropriated. The Income tax Department never disputed the fact that the Government of AP has a right to receive income from the assessee. The new amendment to the Excise Act also clearly establishes the fact that the entire income of the assessee is not that of the State and only the amount specified as privilege fee is income of State. This is contrary to the argument of the assessee that income from trading in liquor is exempt from taxation because the entire activity is conducted on behalf of State. Further, it may be submitted that the assessee has no other income for the present year except income from trading in liquor and the argument of the counsel of the assessee that the assessee has filed returns of income because there could be income from other sources is also devoid of merit. The fact that Assessee Corporation voluntarily complied with tax audit provisions and commercial audit provisions year after year shows clearly that it recognized the fact of its liability under the Income-tax Act.
13. As per the newly inserted section 4A of the State Excise Act, it is stated that "the Government shall from time to time specify the Trade margin, privilege fee or any other levy, by whatever name is called, to be collected by the Andhra Pradesh Beverages Corporation Limited from the holders of licences". For the year under consideration, no amount was specified by the State u/s 4A. Since the provision is just introduced the amounts could not have been specified in the earlier years. The amount paid is also not collected from the holders of licences separately as required u/s 4A but paid out of the funds of the assessee realized from its sales and as per its own calculations. The invoices raised by the assessee do not indicate separate amounts as privilege fee or special privilege fee or sports privilege fee. Therefore, the arguments of the assessee are self-contradictory in light of the newly inserted section 4A.
14. As per new section 4B, the amount of privilege fee needs to be remitted to Government in the manner 30 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
specified by the Government. However, the manner of computation is not specified u/s 4B. Therefore, the computation still needs to be made u/s 23A which specifies that the margins after meeting expenditure shall be paid as privilege fees. In this context, the stand of the Department that income tax is an expense in commercial sense and as per the mandate in AS - 22 remains un-assailed. There is a primary distinction between the case of the assessee and that of the corporations of other States. In the case of the assessee, it makes its own computations, derives the surplus at the end of the day and pays the same in the name of 'fee', whereas in other cases, the 'fee' is a fixed amount under the rules or a specific amount based on stock quantity determined as per the rules. If section 23A gets repealed on a notified date, even this mechanism would fail leaving no basis for computation.
15. Also, the issue of retrospective levy was considered by the Hon'ble Supreme Court in the case of D. Cawasji & Co vs State of Mysore & Others, (150 ITR
648). In the said case, the Mysore State Government passed an amendment to the Sales Tax Act to ratify the amounts collected as tax with retrospective effect. It was argued by the appellants before the Court that the amendment is arbitrary and it does not remove the lacunae in the Act. In the said case, the High Court held as follows.
"It appears that the only object of enacting the amended provision is to nullify the effect of the judgment which became conclusive and binding on the parties to enable the State Government to retain the amount wrongfully and illegally collected as sales tax and this object has been sought to be achieved by the impugned amendment which does not even purport or seek to remedy or remove the defect and lacuna but merely raises the rate of duty from 61/2% to 45% and further proceeds to nullify the judgment and order of the High Court. In our opinion, the enhancement of the rate of duty from 61/2% to 45% with retrospective effect is, in the facts and circumstances of the case, clearly arbitrary and unreasonable. The defect or lacuna is not even sought to be remedied and the only justification for the steep rise in the rate of duty by the amended provision is to nullify the effect of the binding 31 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
judgment. The vice of illegal collection in the absence of the removal of the illegality which led to the invalidation of the earlier assessments on the basis of illegal levy, continues to taint the earlier levy. In our opinion, this is not a proper ground for imposing the levy at a higher rate with retrospective effect. It may be open to the Legislature to impose the levy at a higher rate with prospective operation but the levy of taxation at higher rate which really amounts to imposition of tax with retrospective operation has to be justified on proper and cogent grounds".
It is humbly submitted that in the instant case also, the amendment is made to ratify the payments only with a view to avoid payment of income tax. Hence, such amendment is illegal and cannot be applied retrospectively. Even otherwise, the latest amendments does not in any way come to the rescue of the assessee in view of the judgements of the Apex Court on Aritcle 289 of the Constitution and on tax liability of a corporation vis-à-vis the state government.
16. The first case related to TASMAC was decided by ITAT (42 ITD 349) where it was held that sec 43B did not apply to 'vend fee' since it was more in the nature of a price paid to the State rather than a tax or duty. The facts of the said case are totally distinguishable from that of the case of the assessee, where the privilege fee was residuary and in the nature of a balancing figure.
As on date one more case is pending before the Hon'ble ITAT, Chennai Bench, and the facts in dispute in the said case are totally different.
a) In the case of TASMAC, the issue pending before ITAT, Chennai Bench is not on the admissibility of privilege fee.
b) The issue in the said case is on retrospective determination of special privilege fee/additional vend fee after the closure of the financial year through a GO issued by State Government.
c) As per section 17C of the Tamil Nadu Prohibition Act, 1937, State Government is empowered to levy privilege 32 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
fee/vend fee as per the rules framed in this behalf. Proper rules are framed by the Government vide Tamil Nadu Indian Made Foreign Spirits (Supply by Wholesale) Rules, 1983. Quantum of fee is specified through these rules at a fixed amount on kilo litre/litre of liquor stock held by TASMAC.
d) GOs are issued from time to time under the said rules where in the quantum of fee is revised but it is always based on quantum of the liquor stock.
e) Another case involving privilege fee is that in the case of Rajasthan State Beverages Corporation Ltd. However, in the said case also, the privilege fee is a fixed amount levied as per the Rules framed under the Rajasthan Excise Act.
f) ITAT Jaipur Bench in its decision dated 21-10-2011, in the case of Rajasthan State Beverages Corporation Ltd for A.Y 2007-08 allowed privilege fee. However, the facts are entirely different and certain comments in the said case are of crucial significance.
g) In the said case, the assessee paid Rs.15 Cr as privilege fee. This privilege fee was paid as per the authority u/s 30 and 42(c) of the Rajasthan Excise Act through an order by the competent authority. The reason for disallowance by the AO was that the fee was capital in nature. ITAT followed its own decision for earlier year and allowed the fees as deduction.
h) The finding of the ITAT in the said case as quoted from its earlier order is : "the assessee earned huge profit even after paying the privilege fee". Therefore, there is clear element of quid pro quo in the said case. In the case of M/s APBCL, the fee is not fixed and the element of proportionality or quid pro quo is missing and only profit is paid back and it is also recognized on the website that it is ploughing back of profit in the name of privilege fee.
17. Thus, the case of the assessee is not comparable with that of TASMAC or Rajasthan State Beverages Corporation Ltd. In the both the said cases, the fees is fixed at a specified quantum where as in the case of the assessee, the fee needs to be computed under section 23A of the AP State Excise Act and this can be 33 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
a variable amount and could vary from Rs.1 to any amount depending on the profits made by the assessee. Therefore, the fee in the case of the assessee is nothing but passing on of profits to the Government of AP.
18. In the present case, the fee is a balancing charge on the P&L account. Apparently, the intention of the State is to appropriate 100% of profit. However, such profit can be arrived only after meeting the expenditure which for this purpose should include income tax. Thus, income-tax is to be paid first and the resultant surplus is to be paid as appropriation of profit may be in the name of fee or by whatever name called.
19. Without prejudice to the above, it is also submitted that 'fee' involves element of quid pro quo as held by the Supreme Court in the case of The Hingir-Rampur Coal Company Ltd [1961 AIR 459]. In the said decision, the Apex Court held that " it is true that between a tax and a fee there is no generic difference. Both are compulsory exactions of money by public authorities; but whereas a tax is imposed for public purposes and is not, and need not, be supported by any consideration of service rendered in return, a fee is levied essentially for services rendered and as such there is an element of quid pro quo between the person who pays the fee and the public authority which imposes it. 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 as 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. Tax recovered by public authority invariably goes into the consolidated fund which ultimately is utilised for all public purposes, whereas a cess levied by way of 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. There is, however, an element of compulsion in the imposition of both tax and fee. ..... In regard to fees there is, and must always be, co-relation between the fee collected and the service intended to be rendered. Cases may 34 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
arise where under the guise of levying a fee Legislature may attempt to impose a tax; and in the case of such a colourable exercise of legislative power courts would have to scrutinise the scheme of the levy very carefully and determine whether in fact there is a co-relation between the service and the levy, or whether the levy is either not co-related with service or is levied to such an excessive extent as to be a presence of a fee and not a fee in reality. In other words, whether or not a particular cess levied by a statute amounts to a fee or tax would always be a question of fact to be determined in the circumstances of each case". The Hon'ble Court also held that "In order to determine whether a levy is a tax or a fee, what has to be considered is the pith and sub- stance of the levy. Where the levy in pith and substance is not essentially different from a tax, it cannot be converted into a fee by crediting it to a special fund and attaching certain services to it".
20. The decision of Supreme Court in the case of Jindal Stainless Ltd (283 ITR 1) also reaffirms the above view. In the said case the Constitution Bench of five Judges held that the theory of compensatory tax is that it rests upon the principle that if the Government by some positive action confers upon individual(s), a particular measurable advantage, it is only fair to the community at large that the beneficiary shall pay for it. The basic difference between a tax on the one hand and a fee/compensatory tax on the other hand is that the former is based on the concept of burden, whereas compensatory tax/fee is based on the concept of recompense/reimbursement. For a tax to be compensatory, there must be some link between the quantum of tax and the facility/services. Every benefit is measured in terms of cost which has to be reimbursed by compensatory tax or in the form of compensatory tax. In other words, compensatory tax is a recompense/reimbursement. In the context of Article 301, therefore, compensatory tax is a compulsory contribution levied broadly in proportion to the special benefits derived to defray the costs of regulation or to meet the outlay incurred for some special advantage to trade, commerce and intercourse.
21. It may also be submitted that the Supreme Court had no occasion to consider the above decisions in 35 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
McDowells case because the issue was limited to applicability of section 43B and not on the true nature of the 'levy'. Without prejudice to this, it may be submitted that even in the case of McDowells, the fee was quantifiable and not amounting to appropriation of entire profit. In light of this, it is very difficult in the instant case to call the privilege fee as 'fee' as all the elements of 'tax' or 'levy' are missing and also in that no specific services are rendered by the government in return for the 'fee'. It is also a fact that the entire amount goes to the Consolidate fund of the State but not incurred towards rendering any service to the corporation against the fee collected. Hence, the element of quid pro quo is missing.
22. It is also submitted that for the A.Ys 2004-05 and 2005-06, the tax audit reports indicate that the tax auditor qualified privilege fee as item covered u/s 43B. For A.Y 2006-07, the tax audit report is not on record. It is quite likely that for this year also, the assessee might have treated the items as covered u/s 43B. In the present proceedings, U turn is made. Therefore, it is a case of shifting of stand by the asssessee as per its convenience.
23. With reference to the arguments on change of opinion, as already submitted res judicata does not apply to Income Tax proceedings. The decision of Supreme Court in the case of Catholic Syrian Bank Ltd [2101-TIOL-16-SC-IT-LB], the Supreme Court held that "Merely because the orders of the Special Bench of the ITAT were not assailed in appeal by the Department itself, this would not take away the right of Revenue to question the correctness of the orders of assessment, particularly when a question of law is involved. ..... As already noticed, the question raised in the present appeal go to the very root of the matter and are questions of law in relation to interpretation of sections 36(1)(vii) and 36(1)(viia) read with section 36(1)(2) of the Act. Thus, without hesitation, we reject the contention of the appellant banks that the findings recorded in earlier assessment years 1991-1992 to 1993-94 would be binding on the Department for the subsequent years as well".
36 ITA NO. 693/Hyd/2011AP Beverages Corporation Ltd.
24. In summary, it is submitted that in the present case, the CIT was well within his jurisdiction to revise the assessment u/s 263. On the facts of this case, the amount of privilege fee is a balancing charge on the P&L account being variable and not based on quid pro quo. Also, only the amount that remains out of margins after deducing expenditure including income tax would be the sum to be paid as privilege fee. The State Government is well within its right to treat such fee as Income of Government. But, the present amendment does not affect the position in any manner and the assessee is bound to pay income tax before remitting such privilege fee. The fact that it is a case of appropriation of profit is evidenced by their own admission on their website as well as from the information furnished to the public under the RTI Act through the hand book displayed on the website during the said period. The assertion of the AR in earlier hearings that removal of the material after noticing of the same by Income Tax Department is not deliberate but due to technical problems related to website is too good to be believed, because the RTI information hand books displayed on the website in the earlier period clearly mentioned the fact that profits are 'ploughed back' in the name of privilege fee and the relevant figures are also given, whereas the present information booklet on the website specifically omits such data and the assertion. As the case is that of appropriation of profit, the disallowance of privilege fee, special privilege fee and sports privilege fee may kindly be sustained.
25. The case of the department is clearly elaborated in the order u/s. 263. The AP. Excise Act, Accounting Standards, the judgements of Apex Court and the jurisdictional High Court, Website of the assessee, past conduct of the assessee amply justify the action taken by the department form the basis and also justify the action taken by the department, irrespective of the latest amendments. No doubt, the amendments are introduced as recently as on 16.04.2012 to get over the income-tax issues. However, the remedial action taken further reinforces the arguments of the I T Department and will in no way exempt assessee from income-tax provisions. This is especially because these amendments in no way exempt assessee from income- tax in the light of the rulings of the Apex Court and 37 ITA NO. 693/Hyd/2011 AP Beverages Corporation Ltd.
jurisdictional High Court relied upon hereiabove, on interpretation of Article 289 of the Constitution vis-à- vis the liability of a corporation under Income-tax Act.
24. We have heard both the parties, perused the record and gone through the orders of the authorities below. We find that the amendments passed by the Andhra Pradesh Legislature on 16-04-2012, vide G.O. Ms. No. 326, Revenue (Excise-II), 21 st May, 2012 to the Andhra Pradesh Excise and Andhra Pradesh (Regulation of trade in Indian made foreign liquor, Foreign Liquor) Acts, (Amendment) Act, 2012(Andhra Pradesh Act No. 5 of 2012), has to be examined and analysed taking into account the submissions made by the learned DR Shri V. Srinvias. The learned DR has pointed out that the following:
i) with respect to newly inserted section 4C, it only reaffirms the fact that it is the profit that is sought to be appropriated. According to the DR, the new amendment to Excise Act, clearly establishes the fact that the entire income of the assessee is not that of the State and only the amounts specified as privilege fees is income of the State.
ii) with respect to newly inserted section 4A, the invoices raised by the assessee do not indicate separate amounts as privilege fee or special privilege fee or sports privilege fee.
iii) with respect to the newly inserted section 4B, the manner of computation is not specified under 4B and the computation needs to be made u/s 23A and the implication of AS-22 is to be examined.38 ITA NO. 693/Hyd/2011
AP Beverages Corporation Ltd.
25. Under these circumstances, it is observed that the CIT has no occasion to consider the amendments passed by the Andhra Pradesh Legislature on 16-04-2012, vide G.O. Ms. No. 326, Revenue (Excise-II), 21 st May, 2012 to the Andhra Pradesh Excise and Andhra Pradesh (Regulation of trade in Indian made foreign liquor, Foreign Liquor) Acts, (Amendment) Act, 2012(Andhra Pradesh Act No. 5 of 2012), as the said amendments came after the CIT passed the order u/s 263 of the Act, on 29/03/2011. Therefore, we set aside the order of the CIT and restore the issue in dispute back to the file of the CIT with a direction to decide the issue de-novo after examining the said amendments and in accordance with law after providing reasonable opportunity of hearing to the assessee in the matter.
26. In the result, appeal of the assessee is treated as allowed for statistical purposes.
Pronounced in the open court on 30/07/2012.
Sd/- Sd/-
(CHANDRA POOJARI) (ASHA VIJAYARAGHAVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated:30 th July, 2012.
kv
Copy to:-
1) AP Beverages Corporation Ltd.,
Shri K. Vasantkumar & Shri A.V. Raghuram, Advocates, 610, 6 th Floor, Babukhan Estate, Basheerbagh, Hyderabad - 1.
2) CIT-1, Hyderabad.
3) The ITO, Ward-1(1), Hyderabad
5) The Departmental Representative, I.T.A.T.,
Hyderabad.
39 ITA NO. 693/Hyd/2011
AP Beverages Corporation Ltd.
Description Date Intls
S.No.
1. Draft dictated on 17/07/12 Sr.P.S./P.S
2. Draft placed before author /07/12 Sr.P.S/PS
Draft proposed & placed before JM/AM
3 the second Member
4 Draft discussed/approved by JM/AM
second Member
5 Approved Draft comes to the Sr.P.S./P.S
Sr.P.S./PS
6. Kept for pronouncement on Sr. P.S./P.S.
7. File sent to the Bench Clerk Sr.P.S./P.S
8 Date on which file goes to the
Head Clerk
9 Date of Dispatch of order