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TMI Blog2021 (11) TMI 925X X X X Extracts X X X X X X X X Extracts X X X X ..... s an appeal by the assessee against the order dated 29.09.2018 of CIT(A)-4, Bangalore relating to AY 2014-15. 2. The only issue that arises for consideration in this appeal by the assessee is as to whether the revenue authorities were justified in disallowing a sum of ₹ 7,48,39,937/- being guarantee commission paid to Government of Karnataka, on the ground that the assessee failed to deduct tax at source on the aforesaid payment made to Government of Karnataka by invoking the provisions of Sec.40(a)(iib) of the Income Tax Act, 1961 (Act). 3. The assessee is a wholly owned company formed by the Govt. of Karnataka for the purpose of implementation of the Upper Krishna Project in the state of Karnataka. The assessee availed certain loans from financial institutions. The Government of Karnataka stood as guarantor for the loans so availed by the assessee. Under section 5(1) of the Karnataka Ceiling on Government Guarantees Act, 1999 (Guarantor Act), the Government shall charge a minimum of one percent as guarantee commission which shall not be waived under any circumstance. 4. Assessee made payment of guarantee commission of ₹ 7,48,39,937/- to Government of Karnatak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to protect the tax base of State Government undertakings vis-a-vis exclusively levy of fee, charge, etc or appropriation of amount by the State Government from its undertakings, section 40 of the Income Tax Act has been amended to provide that any amount paid by way of fee, charge, etc, which is levied exclusively on, or any amount appropriated, directly or indirectly, from a State Government undertaking, by the State Government, shall not be allowed as deduction for the purposes of computation of income of such undertakings under the head Profits and gains of business or profession. The expression State Government Undertaking for this purpose includes- (i) a corporation established by or under any Act of the State Government; (ii) a company in which more than fifty per cent of the paid-up equity share capital is held by the State Government; (iii) a company in which more than fifty per cent of the paid-up equity share capital is held by the entity referred to in clause (i) or clause (ii) (whether singly or taken together); (iv) a company or corporation in which the State Government has the right to appoint the majority of the directors or to control th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is charged on any guarantee given to any department of Government, public sector undertaking of state Government, the 'exclusivity' is not there. It was contended that 'exclusivity' will be lost if it is levied from more than one State Government undertaking. (iii) Guarantee commission is a revenue expenditure and has to be allowed as deduction u/s.37 of the Act as held by the Hon ble Supreme Court in the case of CIT Vs. Sivakami Mills Ltd. 227 ITR 465 (SC) and Hon ble Andhra Pradesh High Court in the case of AP State Financial Corporation Vs. DCIT 372 ITR 315 (AP). Even after insertion of Sec.40(a)(iib) of the Act by the Fianance Act, 2013 w.e.f. 1.4.2014, to fall within the ambit of the said provision a payment should be in the nature of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called . Guarantee Commission is not royalty, licence fee, service fee, privilege fee, service charge . It will also not fall within the ambit of the residuary limb or any other fee or charge, by whatever name called used in Sec.40(a)(iib) of the Act. It was submitted that guarantee commission is neither a fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot to contractual or voluntary payments. It was argued that the plain meaning of the words fee and charge cannot not bring commission within their scope. Commission is distinguishable both in the manner in which it is computed and the nature of its legal existence. It is computed usually as a percentage of another amount. It comes into existence as consideration for a service of some sort and is dependent on another collateral financial transaction (here, the guarantee). These characteristics clearly distinguish commission from fee and charge . 8. The argument was rejected both by the AO and the CIT(A) by holding that the ambit of Sec.40(a)(iib) of the Act is very wide and it includes any other fee or charge by whatever name called levied on a state government undertaking by the State Government. Conseqently disallowance of expenses was made and the sum disallowed was added to the total income of the Assessee. The reasons given by the CIT(A) for confirming the action of the AO throw some light on the reasons for introduction of the provisions of Sec.40(a)(iib) of the Act. According to CIT(A), the legislative intent behind the introduction of section 40(a)(iib) was to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, has to deduct tax on sum paid to the State Government in the form of licence fee and shop rent (kist) in accordance with the provisions of Sec.40(a)(iib) of the Act. The argument on behalf of the Assessee in that case was similar to the argument of the Assessee in the present case viz., that the license fee and shop rent (kist) is not a levy exclusively on the Assessee and therefore does not fall within the ambit of Sec.40(a)(iib) of the Act. The Hon ble Kerala High Court upheld the contention of the Assessee and held as follows: 16. With respect to licence fee and shop rental (kist) levied for the retail business is concerned, both sides have advanced conflicting arguments. The situation is that, the business of retail in foreign liquor is restricted to the appellant and to the Consumer Federation, both being state government undertakings. The trade in toddy or other kind of spirits cannot in any manner be equated with the business of retail sale in foreign liquor, for the purpose of human consumption. Contention of the appellant seems to be that, since the said business is permitted also to one another state government undertaking, namely the Consumer Federation, the exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sec.40(a)(iib) of the Act. In this regard we find that the State of Karnataka has passed an Act called Karnataka Ceiling on Government Guarantees Act, 1999 . The preamble to the Act gives the reasons for enactment of the relevant law as An Act to provide for ceiling on Government Guarantees and other matters connected therewith. Whereas it is expedient to provide for ceiling on the Government guarantees issued on behalf of the Government Departments, Public Sector Undertakings, Local Authorities, statutory Boards and Corporations and Co-operative Institutions and for promoting fiscal discipline of the State; BE it enacted by the Karnataka State Legislature in the fiftieth year of the Republic of India, as follows:- 11. The statement of objects and reasons for passing the said Act were as follows: Statement of objects and Reasons - Act 11 of 1999. - To give effect to the proposals made in the Budget Speech and also for implementing the recommendations of the Technical Committee of State Finance Secretaries to fix limit on Government Guarantees, it is considered necessary to bring out legislation to provide for limits on Government Guarantees issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y way of royalty, licence fee, service fee, privilege fee, service charge, or any other fee or charge which is levied exclusively on a state government undertaking by the State Government (emphasis supplied) alone will satisfy the ingredients for disallowance. The statute has not used the word; levied exclusively on the state government undertakings by the State Government. Instead, the word used is exclusively on a state government undertaking . Therefore, in order to bring the disallowance within the ambit and scope of Section 40 (a) (iib), it should be an exclusive levy on the assessee, which should be a state government undertaking. Since the licence fee and shop rental (kist) are also levied from the Consumer Federation with respect to the FL-1 licence granted, it becomes out of the purview of the term 'levied exclusively on a state government undertaking, contained in 40 (a) (iib). Therefore we are persuaded to hold that the disallowance made with respect to the licence fee and shop rental (kist) paid with respect to the FL1 licences granted to the appellant for retail trade in foreign liquor, cannot be sustained. 14. We therefore accept the argument of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hold that the disallowance made u/s.4-(a)(iib) of the Act cannot be sustained. 15. We are also of the view that Guarantee Commission is not in the nature of a levy on a state Government undertaking by the State Government. It is purely a contractual payment. According to Black's Law Dictionary Fifth Edition, the word levy means :- To assess; raise; execute; exact: tax; collect: gather; take . To qualify as a levy within the meaning of Sec.40(a)(iib) of the Act, the payment to the State Government by a State Government undertaking should be based on a power on the part of the State Government to impose a levy. It should be a compulsory exaction by the State Government from the State Government Undertaking. Guarantee Commission is paid in consideration for the State Government agreeing to suffer a detriment in the event of the Assessee not repaying the value of the bonds on its maturity. Guarantee Commission does not fall within the ambit of the mischief that was sought to be remedied by the legislature by inserting Sec.40(a)(iib) of the Act. 9. Respectfully following the aforesaid decision, we hold that disallowance of guarantee commission under section 40( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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