ITAT Chandigarh: Royalty/Commission Paid Between Milk Cooperative Societies Held Legitimate Business Expenditure

ITAT Chandigarh: Royalty/Commission Paid Between Milk Cooperative Societies Held Legitimate Business Expenditure

1. The Dispute: Commission vs. Royalty

The core issue across several years was the disallowance of payments made by the Ropar District Cooperative Milk Producers Union to other milk unions (Patiala, Hoshiarpur, and the Punjab State Federation).

• The Payment: The assessee paid amounts (termed as “commission” in the books) for collecting milk from the “milk-shed areas” (jurisdictions) belonging to other unions.

• The AO’s View: The Assessing Officer disallowed the total expenditure (e.g., ₹2,28,67,595 for AY 2009-10), arguing that no actual services were rendered by the recipient unions and that the payments were “excessive” or voluntary “gifts.”

• The Assessee’s View: The payments were mandatory “royalty” charges fixed by the Government of Punjab/Milkfed @ ₹3 per liter for operating in another union’s territory.

2. The Legal Ruling: Commercial Expediency in Cooperative Structures

The ITAT Chandigarh Bench allowed the appeals and deleted the additions based on the following findings:

I. Nomenclature vs. Substance

The Tribunal observed that the term “commission” used in the accounts was a misnomer that caused the confusion. In reality, the payment was a Royalty.

• Finding: Other unions allowed the assessee to collect milk from their designated areas. While they didn’t provide “services” like doctors or medicines directly for the transaction, they provided the right to access their infrastructure and operational area.

II. Mandatory Government Instructions

The assessee and the recipient unions are all government-established bodies governed by the Punjab State Cooperative Milk Federation (Milkfed).

• Decision: The rate of ₹3 per liter was decided in a Minutes of Meeting (MoM) by a committee of accounts heads and approved by the government. Being a government body, the assessee had no choice but to implement these instructions. Therefore, the expenditure was incurred wholly and exclusively for business purposes under Section 37(1).

III. Prevention of Double Taxation

The recipient unions (Patiala and Hoshiarpur) provided affidavits confirming they had:

1. Received the money.

2. Declared it in their Profit & Loss accounts.

3. Paid the applicable taxes.

• Decision: Taxing the same amount in the hands of the payer (after the receiver has already paid tax) would amount to double taxation, which is impermissible.

3. Final Order Summary

• Total Additions: Multiple Crores across AY 2009-10 to 2015-16.

• ITAT Order: All additions deleted. The expenditure is a valid business deduction.

• Outcome: All appeals of the Assessee are Allowed.

Key Takeaways for Cooperative Societies and Businesses

• Section 37(1) Deductions: Even if an expense doesn’t follow a traditional “service-for-fee” model, it can be claimed if it is a “commercial necessity” or a “statutory/government-mandated” cost.

• The Importance of Nomenclature: Clear accounting labels (e.g., “Area Access Royalty” instead of “Commission”) can prevent years of litigation.

• Evidence of Recipient Tax Payment: Providing proof that the recipient of the money has already paid tax on that income is a strong defense against disallowances under Section 37 or Section 68.