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Kerala State Beverages Manufacturing and Marketing Corporation Limited vs. The Assistant Commissioner of Income Tax

Civil Appeal · 2022 INSC 4Decided 3 Jan 2022
Civil Appeal Nos. 11-14 of 2022
R. Subhash Reddy · Hrishikesh Roy

Background

Kerala State Beverages Manufacturing & Marketing Corporation Ltd. (KSBC), a wholly state-owned liquor trading company, claimed deductions in its income-tax returns for gallonage fee, licence fee, shop rental (kist), surcharge on sales tax, and turnover tax paid to the Kerala government. The tax department disallowed these deductions under Section 40(a)(iib), a provision introduced in 2013 specifically to stop states from shifting profits out of their government-owned undertakings by dressing them up as exclusive "fees or charges." The Kerala High Court gave a split ruling, disallowing the FL-9 wholesale licence fees but allowing the FL-1 retail licence fees (because another state co-operative also held that licence) and allowing the sales-tax and turnover-tax surcharges entirely. Both KSBC and the tax department appealed the parts they lost.

Decision Breakdown

The Supreme Court held that "exclusivity" under Section 40(a)(iib) must be judged by the nature of the levy and the type of entity it falls on (state government undertakings), not by whether more than one state-owned entity happens to hold that category of licence, so both the FL-9 and FL-1 licence fees, gallonage fees and shop rental were disallowable, since a narrower reading would let states dodge the provision simply by licensing multiple government-owned companies. However, the Court agreed with KSBC that the surcharge on sales tax and turnover tax are, in substance, taxes (an enhancement of the underlying sales tax) and not "fees or charges" as that term is used in Section 40(a)(iib), noting that the statute deliberately uses different words for taxes elsewhere and that a surcharge on a tax is legally treated as part of that tax. The revenue's appeals were partly allowed (fees disallowed) and KSBC's appeal was dismissed on that point, while the High Court's ruling permitting deduction of the surcharge/turnover tax was upheld; the matter was remitted to the assessing officer to recompute the tax liability accordingly.

Lesson Learnt

A state cannot avoid tax anti-abuse provisions aimed at licence fees and charges on its own undertakings simply by spreading a licence across more than one government-owned entity (courts will look at the substance and purpose of the levy, not superficial technicalities) but genuine taxes (like a sales-tax surcharge) remain outside the reach of a provision that specifically targets "fees" and "charges."

Official source (sci.gov.in)View Judgment (PDF)

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