Supreme Court rules on scope of statutory dues allowable as deduction on actual payment (Travancore Sugars)

We are pleased to release a Tax Alert which summarizes a recent ruling of the Supreme Court (SC) in the case of Travancore Sugars & Chemicals Ltd.  (Taxpayer) on the issue whether provision for vend fees payable by the Taxpayer to State Government is allowable as deduction on actual payment basis pursuant to a specific provision in Indian Tax Laws (ITL) which permits deduction for ‘tax, duty, cess or fee, by whatever name called, under any law for the time being in force’ on actual payment thereof.

 

The Taxpayer, a company engaged in the manufacture and sale of sugar and liquor, was liable under a state law to collect from customers and pay vend fee to the State Government to be used for repairs/replacement of old machinery of the Taxpayer and two other sugar mills.

 

The SC held that the vend fee compulsorily collected by the State Government was in the nature of a ‘fee’ and hence covered within the scope of the provision. It further held that even if vend fee is not regarded as ‘fee’ in the sense of recompense for a special service/benefit but is consideration paid for granting a ‘privilege’ by parting with exclusive right of the Government, still, it would fall within the wide scope of the provision which covers ‘fee, by whatever name called’. Hence, it is allowable as deduction on actual payment only.

 

The present SC ruling (Two-Judge Bench) provides guidance that the expression ‘tax, duty, cess or fee, by whatever name called’ should be construed very widely to cover any sum if it is payable under a statute. As per SC, the expression “fee” may also cover fee which is collected for grant of a privilege.

 

In the present case, the fund was collected so as to be eventually spent for repairs to be carried out by the Taxpayer and two other concerns. It is not very clear from the ruling whether the SC regarded this as a special benefit or privilege conferred on the Taxpayer or whether grant by the Government of exclusive right to carry on specified activity was considered as a privilege for which vend fee was collected.

 

Incidentally, the present SC ruling does not take note of an earlier SC ruling in the case of CIT v. McDowell & Co. Ltd (Two Judge Bench), where the SC had held that the expression ‘tax, duty, cess or fee, by whatever name called’ does not include within its scope, price or consideration charged by Government for grant of licence by parting with its exclusive privilege. Applying the well-known interpretation rule of ejusdem generis, the SC held that the expression ‘tax, duty, cess or fee, bywhatever name called’ includes only those levies which are in the nature of ‘tax’ which a State levies in exercise of its sovereign power of taxation to raise revenue for the State. 

 

It would be interesting to see how the ratio of above referred two rulings which seemingly appear to be in conflict with each other is reconciled by courts. This would be of a particular significance to those taxpayers by whom licence fees are payable to Government for obtaining a right to carry on a specified activity.