- According to the Chennai Bench of the Income Tax Appellate Tribunal (ITAT), the payment of Value Added Tax (VAT) by Tamil Nadu State Marketing Corporation, a State Government undertaking, is not a fee or charge made by the State Government and cannot therefore be disallowed as a deduction under the terms of Section 40(a)(iib) of the Income Tax Act, 1961.
- The bench of Mahavir Singh (Vice President) and Dr. Dipak P. Ripote (Accountant Member) ruled that the fees levied by the State under Entry 66 cannot include tax levied by virtue of Entry 54 because the State's authority to tax the sale and purchase of alcohol and the State's authority to levy fees are two separate powers that derive from two separate entries in the State list.
- According to the Principal Commissioner of Income Tax (PCIT), the State Government's VAT assessment of the assessee fell inside the purview of Section 40(a)(iib) of the Income Tax Act.
- In light of this, the PCIT issued a revision order, concluding that the assessment made by the Assessing Officer (AO), which permitted the VAT expenses claimed by the assessee as a deduction, was incorrect and detrimental to the interests of revenue. The PCIT instructed the AO to rephrase the assessee's evaluation.
- The assessee appealed to the ITAT against the revision order made by the PCIT.
- Tamil Nadu State Marketing Corporation (TASMAC), the assessee, claimed before the ITAT that it is a state undertaking with the sole right to offer Indian Made Foreign Spirit (IMFS) by wholesale and retail throughout the State of Tamil Nadu.
- The assessee argued that, in accordance with Section 3(5) of the Tamil Nadu Value Added Tax Act, 2006, it sells alcoholic beverages through retail vending outlets throughout the State of Tamil Nadu and charges its clients the sale price of the beverage's bottle as well as the VAT (TNVAT Act).
- The assessee further stated that it follows the requirements of the 2007 Tamil Nadu Value Added Tax Rules by remitting the VAT so collected to the State Government following the filing of the required return.
- It claimed, among other things, that the VAT imposed by the Tamil Nadu government is neither a royalty, licence charge, service price, or privilege tax.
- Thus, it alleged that the assessee's VAT was not subject to the rules of Section 40(a)(iib) of the Income Tax Act.
- In its revised order, the PCIT had stated that the term "royalty, licence fee, privilege fee, service charge, or any other fee or charge," as defined in Section 40(a)(iib), was to be interpreted broadly enough to include sales tax/VAT, the ITAT remarked.
- The Tribunal noted that Entry No.54, List II of the Seventh Schedule of the Constitution of India authorises the Government of Tamil Nadu to levy the VAT.
- While concluding that Entry 54 of List II grants the State the sole authority to impose taxes on the sale and purchase of alcoholic liquor, the ITAT pointed out that Entry No. 66 of List II grants the State the authority to impose fees in relation to the matters listed in List II.
- As a result, the Tribunal ruled that the fees levied by the State under Entry 66, by whatever name, cannot include the tax levied by virtue of Entry 54 because the State Government's authority to levy tax on the sale and purchase of alcohol and the authority to levy fees are two separate powers that derive from two separate entries in the State list.
- As a result, the Tribunal upheld the appeal and overturned the PCIT's revision order.
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