‘Bangalore Metro’s’ revenue cannot be considered State Government revenue only because the government controls the metro: ITAT

Bangalore Metro Rail Corporation Ltd. v. DCIT – [2023]

The company which was the subject of the investigation has 50% of its shares owned by the government of India and 50% by the government of Karnataka. The major goal of the assessee was to build circular or other types of railway lines in and around Bangalore City in order to establish, run, and maintain a rapid rail transportation system.

In creating a rail-based rapid transportation network, the assessee claimed it was functioning as an extra arm of the State Government. As a tool and representative of the state government, it ought to be referred to as “state.” As a result, in accordance with Article 289 of the Indian Constitution, its revenue cannot be subject to taxation.

The Bangalore Tribunal heard the case.

The Tribunal determined that the income of a State, and not the income of an instrumentality or agency of a State, is eligible for the exemption from taxation. Since private parties may equally engage in the activity of rail transportation, the assessee was not carrying out a sovereign function of the government.

The assessee, a separate corporation run by a board of directors, was engaged in the business of transporting passengers via train. The Corporation set the ticket price, which was not set at a cost-to-cost basis and included a profit margin. It was not operating by the no-profit, no-loss principle.

Rail passenger transportation must be viewed as a commercial operation. The activity that the assessee engages in is not unlike from that of private entrepreneurs. It is always the assessee company’s commercial activity driven by a profit motivation.

Furthermore, the nature of “business activity” would not change as a result of the control or directives given by the State Government. The terms “ownership of the Corporation” and “activities of the Corporation” refer to two different things, and ownership cannot be used to describe or predict the nature or kind of the Corporation’s activities.

Incorporated under the Companies Act for the purpose of conducting business, the assessee has its own distinct personality, and any gains or losses resulting from that activity belong to the corporation as a whole. As a result, it is impossible to say that the income generated by the Corporation’s commercial activities belongs to the Karnataka State Government.

As a result, the assessee cannot be regarded as a component of a government agency exempt from union taxation.