CWP No.14797 of 2010 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. CWP No.14797 of 2010 Date of decision: 26.10.2010 Larsen & Toubro Limited -----Petitioner Vs. The State of Haryana and others ----Respondents CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL Present:- Mr. K.L.Goyal, Sr. Advocate, Mr. N.Venkataraman, Sr. Advocate with Mr. Sandeep Goyal, Mr. Mohammad Shaffiq and Mr. P.Puroshotham, Advocates for the petitioner. Mr. Gagandeep Singh Wasu, Addl.A.G.Haryana for the State. Mr. Jagmohan Bansal, Advocate for respondent No.5. Adarsh Kumar Goel,J. 1. This order will dispose of CWP Nos. 14797 of 2010, 19981, 12582 of 2008 and 4940 of 2009 as common questions are involved in these petitions. 2. Challenge in all the petitions is to validity of statutory provisions in Sales Tax law in Punjab and Haryana for deduction of tax at source out of payment made to contractors for execution of works contracts involving transfer of property in goods at specified rate. Main objection against the said provisions is that percentage out of total payment could not be made basis of deduction of tax at source unless the amount to be deducted represents the tax and payment is of taxable turnover. The entire payment not being the taxable turnover either on account of part of turnover being towards service element in a composite works contract or on account 1 CWP No.14797 of 2010 of its being turnover of inter-state sale and purchase, sales outside the State or sales in the course of import. The contention is based on judgments of the Hon’ble Supreme Court in Steel Authority of India Limited v. State of Orissa and others, AIR 2000 SC 946 and Rapti Commission Agency v. State of UP and others, (2006) 6 SCC 522. 3. We may make a brief reference to the averments in the writ petitions. 4. In CWP No.14797 of 2010, relating to the State of Haryana, case of the petitioner is that it is a construction company undertaking execution of works contract for different clients including the State and Central Governments and Public Sector Undertakings. Nature of its work includes laying of roads, construction of bridges, flyovers, refineries, power projects on turnkey basis as per contract documents. One of the contracts entered with respondent No.5 National Fertilizer Limited has been annexed as Annexure P.3. Total payment to be made to the contractor does not represent taxable turnover under the Haryana Value Added Tax Act, 2003 (Haryana VAT Act) as turnover of import of goods involved in the contract and turnover representing service element are liable to be deducted therefrom but the impugned provision does not provide for any machinery for ascertaining taxable turnover. Recovery of tax out of non taxable turnover is beyond the legislative competence of the State Legislature. 5. Only defence taken in the reply filed on behalf of the State is that the petitioner could seek exemption under Rule 33(7) of Haryana Value Added Tax Rules, 2003 or seek refund after assessment. 6. Averments in CWP No.19981 of 2008 relating to the State of Punjab and other petitions are identical. It has been stated that the petitioner is undertaking works contract at Amritsar Airport under agreement Annexure P.1. The payment to be received by it under the agreement does 2 CWP No.14797 of 2010 not entirely represent taxable turnover under the Punjab Value Added Tax Act, 2005 (Punjab VAT Act) but also turnover representing rendering of service and of import of goods to be used in the execution of the contract without providing any machinery for deduction of the non-taxable turnover from the total payment. 7. As in the case of Haryana, stand of the State of Punjab is also identical though no reply has been formally filed. 8. Thus, common question of law arising in all the petitions is whether the impugned provisions to the extent they provide for deduction of percentage of payment to be made under a works contract without limiting the deduction of tax to taxable turnover, can be held to be within the competence of State legislature. 9. In order to determine the said question, it will be appropriate to refer to the statutory provisions: Haryana VAT Act, 2003: Section 24. (1) The State Government may, having regard to the effective recovery of tax, require in respect of contractors or any other class or classes of dealers that any person making payment of any valuable consideration to them for the execution of a works contract in the State involving transfer of property in goods, whether as goods or in some other form or for sale of goods in the State, as the case may be, shall, atthe time of making payment, whether by cash, adjustment, credit to the account, recovery of dues or in any other manner, deduct tax in advance therefrom which shall be calculated by multiplying the amount paid in any manner with such rate not exceeding ten per cent, as the State Government may, by notification in the Official Gazette, specify and different rates may be specified for different 3 CWP No.14797 of 2010 works contracts or class or classes of dealers, and that such person shall keep record, of the payments made and, of the tax deducted in advance therefrom, for a period of five years from the close of the year when the payments were made and shall produce such record before the prescribed authority when so required for carrying out the purposes of this Act. (2) The provisions of sub-section (1) shall not apply where the amount or the aggregate of the amounts paid or likely to be paid during a year by any person to a dealer does not or is not likely to exceed one lakh rupees or such other amount as may be prescribed. (3) Every person who is required to deduct tax in advance under sub-section (1) shall furnish such returns at such intervals by such dates in such manner to such authority as may be prescribed and shall pay the tax deducted according to such returns to the State Government in such manner as may be prescribed. (4) Every person referred to in sub-section (3) shall issue to the payee a certificate of tax deduction and payment in such form in such manner as may be prescribed. (5) Any tax paid to the State Government in accordance with sub-section (3) shall be adjustable by the payee, on the authority of the certificate issued to him under sub- section (4), with the tax payable by him under this Act and the assessing authority shall, on furnishing of such certificate to it, allow the benefit of such adjustment after due verification of the payment. (6) If any person fails to deduct the whole or any part of he tax as required by or under the provisions of sub- section (1), or fails to pay the whole or any part of the 4 CWP No.14797 of 2010 tax as required by or under sub-section (3), then, the authority referred to in sub-section (3) may, at any time within five years of the close of the year when he failed to do so, by order in writing, direct him, after giving him a reasonable opportunity of being heard, to pay, by way of penalty, a sum equal to the amount of tax which he failed to deduct or pay as aforesaid.” Haryana VAT Rules, 2003 Rule 33 Payment of Tax and Other Dues and Refund 33. (1) Every Government agency, public sector undertaking or corporation procuring food grains in the State at the minimum support price (with or without bonus) fixed from time to time for such grains or any person authorised by such agency, undertaking or corporation in this behalf and acting as such, shall, at the time of making payment, whether by cash, adjustment, credit to the account, recovery of dues or in any other manner to the commission agent as valuable consideration for selling the grains, deduct tax in advance from such payment calculated by multiplying the amount paid in any manner with four per cent or such other rate, as notified under sub-section (1) of section 24. (2) Every contractee shall, at the time of making payment, whether by cash, adjustment, credit to the account, recovery of dues or in any other manner, deduct from the payment made to the contractor for execution of a works contract in the State involving transfer of property in goods, whether as goods or in some other form, tax in advance calculated by multiplying the amount paid in any manner with four per cent or such other rate, as notified under sub-section (1) of section 24. 5 CWP No.14797 of 2010 Explanation. – For the purpose of the foregoing sub- rules, the valuable consideration shall not include the amount of tax, if any, forming part of the consideration. (3) The provisions of sub-rules (1) and (2) shall not apply where the amount or the aggregate of the amounts paid or likely to be paid during a year to the supplier of grains or the contractor, as the case may be, does not or is not likely to exceed one lakh rupees. (4) The provisions of sub-rule (2) shall not apply where both the contractee and the contractor are dealers registered under the Act and the contract relates to manufacture or processing of goods for sale. (5) The amount, which any person is required to deduct in a month under the foregoing sub-rules, shall be paid by him within fifteen days of the close of the month into the appropriate Government Treasury in challan in Form VAT-C1 separately for each payee in the manner laid down in rule 35. The person making the payment shall affix the original copy of the challan with the return filed by him and shall furnish the fifth copy to the payee concerned as a certificate of tax deduction and payment, who shall affix it with his return. Provided that the Commissioner may by order in writing permit such person to pay by grouping a number of payees in a single challan or challans subject to each such challan showing the name of each payee and the amount deposited in respect of him separately: Provided further that such person shall provide to each payee whose name appears in the challan a self- authenticated copy of the challan: (6) The payee to whom a certificate of tax deduction and payment referred to in sub-rule (5) has been furnished shall, subject to verification of genuineness and correctness of the certificate, be entitled to deduct the amount shown in it from the amount of tax due from him 6 CWP No.14797 of 2010 for the period specified in the certificate and shall pay the balance in the manner laid down in rule 35 and any amount paid in excess shall be refundable on assessment. (7) The Commissioner may, on application made to him, order that no deduction from the payment made to any person shall be effected under this rule or that deduction shall be effected at a rate lower than the rate mentioned under this rule or notified in this behalf if he is satisfied that (i) such person is a registered dealer; (ii) he has not elected to pay lump sum in lieu of sales tax; and (iii) non deduction or deduction at a lower rate, as the case may be, shall neither adversely effect nor delay the recovery of tax from him. Punjab VAT Act, 2005 Section 27(1) Notwithstanding anything contained in any of the provisions of this Act, every contractee responsible for making payment to any person (hereinafter in this section referred to as the contractor) for discharge of any liability on account of valuable consideration, exceeding rupees five lac in a single contract payable for the transfer of property in goods (whether as goods or in some other form) in pursuance of a works contract, shall, at the time of making such payment to the contractor either in cash or in any other manner, deduct an amount equal to two per cent of such sum towards the tax payable under this Act on account of such contract: Provided that any individual or Hindu undivided family not registered under this Act, shall not be liable for deduction of such tax. (2)Any contractor responsible for making any payment or discharge of any liability to any sub- contractor or in pursuance of a contract with the sub-contractor, for the transfer of property in goods (whether as goods or in some other form) 7 CWP No.14797 of 2010 involved in the execution whether wholly or in part, of the work undertaken by the contractor, shall, at the time of such payment or discharge, in cash or by cheque or draft or by any other mode, deduct an amount, equal to two per cent of such payment or discharge, purporting to be a part of the tax, payable under this Act on such transfer, from the bills or invoices raised by the sub-contractor, as payable by the contractor. (3)Every person liable to deduct tax at source under sub-section (1) or sub-section (2), as the case may be, shall make an application in the prescribed manner to the designated officer for allotment of Tax Deduction Number. The designated officer, after satisfying that the application is in order, shall allot Tax Deduction Number. (4)The amount deducted under sub-section (1) or sub-section (2), as the case may be, shall be deposited into the Government Treasury by the person making such deduction in the prescribed manner and shall also file a return of tax deduction and payment thereof in such form and in such manner, as may be prescribed. (5)Any deduction made in accordance with the provisions of this section and credited into the Government Treasury, shall be treated as payment towards the tax payable on behalf of the person from whose bills and invoices, the deduction has been made and credit shall be given to him for the amount so deducted on the production of the certificate, in the prescribed form in this regard. (6)If any contractee or the contractor, as is referred to in sub-section (1) or sub-section (2), as the case may be, fails to make the deduction or after 8 CWP No.14797 of 2010 deducting such amount fails to deposit the amount so deducted, the designated officer may, after giving an opportunity of being heard, by order in writing, direct that the contractee or the contractor shall pay, by way of penalty, a sum, equal to the amount deductible under this section, but not so deducted, and if deducted, not so deposited into the Government Treasury. (7)Without prejudice to the provision of sub-section (6), if any contractee or the contractor, as the case may be, fails to make the deduction or after deducting, fails to deposit the amount so deducted, he shall be liable to pay simple interest at the rate of one and half per cent per month on the amount deductible under this section, but not so deducted and, if deducted, but not so deposited, from the date on which such amount was deductible to the date, on which such amount is actually deposited. (8)Where the amount has not been deposited after deduction, such amount together with interest referred to in sub-section (7), shall be a charge upon all the assets of the person concerned. (9)Payment by way of deduction in accordance with sub-section (1) or sub-section (2), shall be without prejudice to any other mode of recovery of tax, due under this Act from the contractor or the sub-contractor, as the case may be. (10) Where on an application being made by any contractor or sub-contractor, the Commissioner or designated officer is satisfied that no deduction of tax or deduction of tax at a lower rate is justified, he shall grant him such certificate permitting no deduction of tax or deduction of tax at a lower rate, as the case may be. On furnishing of such certificate, the person responsible for deduction of tax, shall comply with such certificate. 9 CWP No.14797 of 2010 Punjab VAT Rules, 2005 Rule 46 46. Liability of persons in case of works contract.--(1) A person entering into a contract with a contractor or a contractor entering into a contract with a sub-contractor for transfer of property in goods in execution of a works contract, shall furnish to the commissioner or the designated officer, particulars of such contract in Form VAT-25 within a period of thirty days from the date of entering into such contract. (2) A person entering into a contract with a contractor or a contractor entering into a contract with a sub-contractor for transfer of property in goods for execution of a works contract, who is also liable for deduction of tax, shall within a period of thirty days of accruing his liability to deduct the tax, make an application, complete in all respects to the designated officer in Form VAT-26, for allotment of tax deduction number. The designated officer shall allot tax deduction number to the person concerned within a period of seven days from the receipt of the application. (3) The tax deducted under the Act, shall be deposited by the person deducting the tax through a challan in Form “VAT-2” in the appropriate Government Treasury within a period of fifteen days from the close of each month. (4) A monthly statement of the deposits made under sub-rule (3), shall be furnished by the persons concerned in Form “VAT-27” alongwith the proof of payment within a period of fifteen days after the date of deposit. 10 CWP No.14797 of 2010 (5) The person deducting the tax, shall issue a certificate of such tax deduction at source in Form VAT - 28, which shall entitle the contractor to claim credit for such amount in the return. 10. We may now refer to the law laid down by the Hon’ble Supreme Court on the subject. In Steel Authority of India Limited, identical provision in Orissa Sales Tax Act was considered and was held to be ultravires the power of the State Legislature to the extent it provided for recovery of tax out of non taxable turnover relating to component of inter state sales, outside sales or sales in the course of import. Relevant observations are:- “13. There can be no doubt, upon a plain interpretation of Section 13-AA, that it is enacted for the purposes of deduction at source of the State sales tax that is payable by a contractor on the value of a works contract. For the purposes of the deduction neither the owner nor the Commissioner who issues to the contractor a certificate under Section 13-AA(5) is entitled to take into account the fact that the works contract involves transfer of property in goods consequent upon an inter-State sale, an outside sale or a sale in the course of import. The owner is required by Section 13-AA(1) to deposit towards the contractor’s liability to State sales tax four per cent of such amount as he credits or pays to the contractor, regardless of the fact that the value of the works contract includes the value of inter-State sales, outside sales or sales in the course of import. There is, in our view, therefore, no doubt that the provisions of Section 13-AA are beyond the powers of the State Legislature for the State Legislature may make no law levying sales tax on inter-State sales, outside sales or sales in the course of import. 11 CWP No.14797 of 2010 xx xx xx xx 15. It was then contended by learned counsel for the State that the Preamble of the Orissa Sales Tax Act took account of the fact that that statute was limited to the sale or purchase of goods in Orissa. Unfortunately, it would appear that the State Legislature overlooked its limitations, even as contained in the Preamble, when enacting Section 13-AA. It was also contended that the deduction that was required to be made under Section 13-AA(1) was of four per cent of the amount credited or paid by the owner to the contractor, whereas the sales tax liability of the contractor thereon was eight per cent. It was contended that this requirement proceeded on the assumption that half of the amount was not liable to tax being in respect of inter-State sales, outside sales and export sales. No such assumption based on the rate of tax at any given point of time can be made. Section 13-AA should have been precisely drafted to make it clear that no tax was levied on that part of the amount credited or paid that related to inter-State sales, outside sales and sales in the course of import, particularly after the previous Section 13-AA had been struck down by the Orissa High Court for the reason that it was couched in terms wider than were permissible to the State Legislature and that judgment was accepted.” 11. Similarly in Nathpa Jhakri Jt. Venture v. State of HP and others, (2000) 118 STC 306, judgment in Steel Authority was followed in respect of corresponding provisions of Bihar Sales Tax Act. The relevant observations are:- “4. A bare perusal of the two provisions will make it clear that in either provision there is an obligation to deduct from transactions relating to works contract on bills or invoices 12 CWP No.14797 of 2010 raised by the works contractor an amount not exceeding 4 per cent or 2 per cent, as the case may be. Though the object of the provision is to meet the tax in respect of the transactions on all works contracts on the valuable consideration payable for the transfer of property in goods involved in the execution of the works contract, the effect of the provision is that irrespective of whether the sales are inter-State sales or outside sales or export sales which are outside the purview of the State Act and those transactions in respect of which no tax can be levied even in terms of the enactment itself such deductions have to be made in the bills or invoices of the contractors. To say that if a person is not liable for payment of tax inasmuch as on completion of the assessment refund can be obtained at a later stage is no solace, as noticed in Bhawani Cotton Mills Ltd. v. State of Punjab, (1967) 20 STC 290 (SC) : (1967) 3 SCR 577.. Further, there is no provision for certification of the extent of the deduction that can be made by the authority. Therefore, we must hold that arbitrary and uncanalised powers have been conferred on the person concerned to deduct up to 4 per cent from the sum payable to the works contractor irrespective of whether ultimately the transaction is liable for payment to any sales tax at all. In that view of the matter, we have no hesitation in rejecting the contention advanced on behalf of the State. 5. The learned counsel drew our attention to the decision in a case arising under the Bihar Sales Tax Act and the earlier decision under the Orissa Sales Tax Act, but in view of the decision of this Court in Steel Authority of India, (2000) 118 STC 297, it is wholly unnecessary to refer to the same. Following the decision in Steel Authority of India case, (2000) 118 STC 297 (SC) we allow this appeal and set aside the order made by the High Court by allowing the writ petition and quashing the aforesaid provisions as being beyond the purview of the Himachal Pradesh State Legislature. Such amount as has been collected from the 13 CWP No.14797 of 2010 appellant under provisions of Section 12-A read with Rule 31-A shall forthwith be refunded by the State. If any amount has been deposited in any bank pursuant to orders passed by this Court or the High Court, it shall be refunded to the appellant with interest accruing thereon.