HIGMN R H COURT OF JUDICATURE CHHATT!SGARH : BILASPU (Division Bench) CORAM : HON’BLE SHRI SR. NAYAK, C.J. 8: HON’BLE SHRI DR‘ DESHMUKH, J hf;- w HOM N’BLE SHRI D.R. DESHMUKH J M WRIT PETITION NO.661 OF 2002 N ORDER FOR CONSIDERATION i sci/— CHIE?3D§iiCE I 7/02/2006 Raosaheb peg“ \‘Dillp A Ju’dg'e 90 //sd/l./ mukh POST IT FOR PRONOUNCEMENT OF ORDER ON: 21l02i2006 sdl- rCrlgef Jusdce ’ 17 10212006 HIGH COURT OF JUDICATURE CHHATTISGARH : BILASPUR (Division Bench) CORAM : HON’BLE SHRI SR. NAYAK, C.J. & HON’BLE SHRI D.R. DESHMUKH, J 91 WRIT PETITicN No.661 OF 2002 ,1? - PETITIONER M/s. V.T.P. Constructions Prop. Shri Krishana Mudliar Station Road Rajnandgaon (C.G.) Versus RESPONDENTS 1. State of Chhattisgarh through secretary Department of Commercial tax. D.K. Mantraiaya Bhavan Raipur (C.G.) Commissioner of Commercial tax. Raipur (C.G.) Deputy Commissioner of Commercial Tax. Durg (C.G.) Commercial Tax Officer. Rajnandgaon (C.G.). . Present : Mr. Neelabh Dubey, learned counsel for the petitioner. Mr. Utkarsha Verma, learned Dy. G.A., for the State. kc; > O R D E R (Passed on al5‘February, 2006) The following order of the Court was passed by S.R. NAYAK, CJ: In this writ petition, the Constitutional validity of Section 35 of the Chhattisgarh Vanijyik Kar Adhiniyam, 1994 (for short 'the Adhiniyam’) is questioned. The petitioner is a proprietary concern of one Shri Krishana Mudliar and it has been. executing works contracts for various Departments of the Chhattisgarh State Government and others and it is holding commercial tax registration No.061IRDN/14/2739/02. During the (2) year 2001-2002, the petitioner had executed works contracts awarded by Executive Engineer, P.W.D. (88R), Division Khairagarh‘ for which it received payment of Rs.1 ,27,1 15l- on which saies tax of Rs.2,545/—, being 2% of sum of Rs.1 27,1 15l- was deducted at source towards the sales tax payable by the petitioner as provided under Section 35 of the Adhiniyam. The petitioner has produced copy of certificate of tax deduction dated 11/04/2001 at source made under Section 35 of the Adhiniyam and the same is marked as Annexure-P/1. (3) 1n support of the writ petition, it is contended that Section 35 of the Adhiniyam does not make any provision for deduction and ascertainment of value and nature of goods supplied during execution of works contracts. lt is also contended that Section 35 of the Adhiniyam does not make any provision for determination of value of goods supplied in the course of inter-State trade during execution of works contracts. (4) The writ petition is opposed by the respondents by tiling reply/statement of objections. ln the reply statement, it is stated that the contractors who are engaged in the construction of buildings, roads, bridges, dams etc generally come from other States. The process of assessment of sales tax is very lengthy and before the assessment is completed, such contractors disappear from the scene after receiving full payment under contracts. ln such situation, it was very difdcult for the Commercial Tax Department to trace-out such contractors and eventualiy sales tax payable by such contractors could not be recovered at all thereby causing heavy financial loss to the Government. ln order to safeguard the interest of the State, Section 35 is, enacted in the Adhiniyam and that the State Legislature has legislative competence to enact Section 93 35. It is stated that Section 35 is not a unique provision in the Adhiniyam and similar provisions are enacted in the Saies Tax Acts of other States, for example, Section 6-D of the Uttar Pradesh Trade Tax Act, Section 6-E of the Bengal Finance (Sales-Tax) Act, 1941; Section 25-A of the Bihar Finance Act, 1981; Section 25-B of the Haryana General Sales Tax Act, Section 12-A of the Himachal Pradesh General Sales Tax Act, Section 16- C of the Jammu & Kashmir GeneraISales Tax Act, Section 19-A of the Karnataka Sales Tax Act and Section 13-AA of the Orissa Sales Tax Act. 1947. It is also contended that the Constitutional validity of Section 35 of ‘ the Adhiniyam was alread cosidered and upheld by the Division Bench of the Madhya Pradesh High Court in the case of Punj Lioyd Ltd. Vs. State of Madhya Pradesh and others1. ;\* (5) We have heard Shri Neelabh Dubey, learned counsel for the petitioner and Shri Utkarsha Verma, learned Dy. Govt. Advocate fo the State of Chhattisgarh. Shri Neelabh Dubey would contend that the Legislature of the undivided State of Madhya Pradesh had no legislative competence to enact Section 35 of the Adhiniyam; that he impugned provision violates mandate of Article 286-1 (a)(b) of the Constitution of india. ln support of his submission, Shri Neeih Dubey would place reliance on the judgments of the Supreme Court in Steel Authority of India Ltd. Vs. State o Orissa and othersz, Bhawani Cotton Mills Ltd. Vs. The State of Punjab and anothera, Nata Jhakri Jt. enture Vs. hp V State of Himachal Pradesh and other" and the judgment of the Division Bench of the Karnataka High Court in Larsen & Toubr Ltd. Vs. 1. (1 99 29 VKN 533 6) 2. (2000) 118 etc 297 (so) 3. (1967) 2 etc 290 (so) 4. (2000) 118 STC 306 (SC) y n r t ab f s o 0 94 State of Karnataka and athers5. Shri Utkarsha Verma, learned Dy. Govt. Advocate, for the State of Chhattisgarh, per contra, while maintaining that Section 35 of the Adhiniyam is infra w'res would heavHy depend upon the judgment of the Madhya Pradesh High Court in Punj Lloyd Ltd. Vs‘ State of Madhya Pradesh and cthers1 (supra) and contend that since the constitutionai vatidity of the very same provision was questioned before the High Court of Madhya Pradesh and since it was upheld, this Court is bound by that judgment and reviewing the Constitutional validity of the same provision again by this Court would not arise. in reply, Shri Neeiabh Dubey would submit that the above judgment of the High Court of Madhya Pradesh, in the first place, did not consider at all the legislative competence of the Legislature of the undivided State of Madhya Pradesh to enact Section 35 and it further overtooked the dictum of the judgment of the Supreme Court in Bhawani Cotton Mills Ltd. Vs. The State of Punjab and another3 (supra). Shri Neelabh Dubey would contend that in view of the judgments of the Supreme Court referred to above, the judgment of the High Court of Madhya Pradesh in Punj Lloyd Ltd. Vs. State of Madhya Pradesh and others‘ (supra) being perincun'am is not a ood law‘ g (6) By virtue of entry 54 of List ll of the Seventh Schedule read with Article 246 of the Constitution of lndia, the States are empOWered to levy taxes on the sale or purchase of goods, other than neWSpapers. The Forty-Sixth Amendment to the Constitution, inter alia, Clause (29A)(b) in Article 366 of the Constitution, as a result, tax on the purchase or sale of goods included a tax ”on the transfer of property in goods (whether as l goods or in some other form) involved in the execution of a works 5. (2003) 129 STC 401 contract". Article 286(1) of the Constitution states that no iaw of a State shall impose, or authorize the imposition of, a tax on the saie or purchase of goods where such saie or purchase takes place outside the State or in the course of the import of goods into, or export of goods out of the territory of india. Articie 286(2) authorizes Parliament by Iaw to formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in sub-Article (1) of Article 286. Acting upon this power, Parliament has set out in Sections 3, 4 and 5 of the Central Sales Tax Act, 1956, principles for determining when a sale or purchase of goods can be said to take place in the course of inter‘State trade or commerce, when a sale or purchase of goods can be said to take place outside the State and when a sale or purchase of goods can be said to take place in the course of import or export. (7) in the background of the above legislative history, let us proceed to analyse Section 35 of the Adhiniyam. By reason of sub- Section (1) thereof, the person letting-out a works contract and responsible for paying any sum to any contractor for carrying out any works contract which involves the sale of any goods in the course of execution is obliged to deduct before making payment of any amount towards the value of such contract 2% of such sum towards the tax payable by the contractor under the Adhiniyam, provided the vaiue of the works contract exceeds rupees one lakh. Sub-Section (1) of Section 35 of the Adhiniyam directs that the amount so deducted shall be adjusted towards the tax assessed on such contractor under Section 27 and any amount that remains after such adjustment shall be refundable to the contractor. Section 27 of the Adhiniyam provides for assessment of tax payable to the State Government under the Adhiniyam. Thus, it is quite 96 clear that the deduction to be made under sub-Section (1) of Section 35 of the Adhiniyam is towards the sales tax that is payable to the State upon works: contract and it is 2% of the value of the works contract. Sub- Section (2) of Section 35 requires the person letting out a works contract to grant to the contractor a certificate in respect of such deduction and to deposit such amount into the Government Treasury in such manner and within such time as may be prescribed. Sub-Section (3) provides that any person making a payment of the amount into the Government Treasury as provided under sub-Section (2) should be deemed to have made the payment thereof on the authority and on behalf of the contractor and the treasury receipt for such payment shall constitute a good and sufficient discharge of the liability of the person to the contractorttowards the value of the contract to the extent of the amount specified in the receipt. By reason of sub-Section (4), such deposit is required to be adjusted by the Sales-Tax Officer towards the sales-tax liability of the contractor and it constitutes good and sufficient discharge of the liability of the person letting out a works contract to the contractor to the extent of the amount deposited. Sub—Section (5) of Section 35 of the Adhiniyam provides that wherea‘person letting out a works contract contravenes the provisions of sub-Section (1) or sub-Section (2) of Section 35 is liable to penalty of an amount which shall be 25% of the amount required to be deducted under sub-Section (1). The person letting out a works contract, therefore, should he contravene sub-Section (1) of Section 35. would be liable to a penalty of an amount which shall be 25% of the amount required to be deducted under sub-Section (1). wges (8) The person letting out a works contract of value exceeding one lakh rupees to a contractor involving sale of goods in the course of A execution thereof, as required by sub-Section (1) of Section 35 of the Adhiniyam, is to deposit towards contractor's Iiability to State sales tax at the rate of 2% of such amount as he pays to the contractor, regardless of the fact that the vaiue of the works contract includes the vaiue of inter- State sales, outside sales or sales in the course of import. The Supreme Court in Gannon Dunkertey and Co. Vs. State of Rajasthan“ in para 8 of the judgment, has held that it is necessary to exclude from the vaiue of a works contract the vaiue of goods which are not taxable by a State in View of Sections 3, 4 and 5 of the Centrai Sales Tax Act, 1956. That dictum mandates that the value of goods involved in the execution of a works contract has to be determined after making these exclusions from the value of the works contract. v: (9) ln Bhawani Cotton Mills Ltd. Vs. The State of Punjab and anothera (supra), the Supreme Court held thus: ------------.--------if a person is not liable for payment of tax at all, at any time, the collection of a tax from him, with a possible contingency of refund at a later stage, will not make the original levy valid; because, if particular sales or purchases are exempt from taxation altogether, they can never be taken into account, at any stage, for the purpose of calculating or arriving at the taxable turnover and for levying tax. )r “if there is a liability to tax, imposed under the terms of the taxing statute, then follow the provisions in regard to the assessment of such liability. If there is no liability to tax there cannot be any assessment either. Sales or purchases in respect of which there is no liability to tax imposed by the In the same case, it was further held as under: 6. (1993) 88 src 204 (so) J\ 98 statute cannot at an be included in the calculation of turnover for the purpose of assessment and the exact sum which the dealer is liable to pay must be ascertained without any reference whatever to the same”. Thus, there can be no doubt, upon a plain interpretation of Section 35 of the Adhiniyam, that section 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, the person letting out a works contract is entitled to take into account the fact that the works contract involves transfer of property in goods consequent upon of an inter-State sale, an outside sale or a sale in the course of import. ln other words, the person letting out a works contract is required by sub-Section (1) of Section 35 of the Adhiniyam to deposit towards the Contractor’s liability to State sales tax of 2% of such amount as he 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. Thus, it is quite clear that the State Legislature in enacting Section 35 in the Adhiniyam acted beyond the power granted to it under Articie 246 of the Constitution read with List l entry 92-A and List li entry 54 of Seventh Schedule. (10) The provisions of section 13-AA (as replaced in 1993) of the Orissa Sales Tax Act, 1947 and that of Section 12-A of the Himachal Pradesh General Sales Tax Act, 1968 which are substantially similar to the provisions of section 35 of the Adhiniyam are struck down by the Supreme Court as unconstitutional on the ground that those provisions .were beyond the purview of the State Legislatures in the case of Steel Authority of indie Ltd. Vs. State of Qrissa and ethetsz (supra) and 99 Nathpa Jhakri Jt. Venture Vs. State of Himachal Pradesh a§1d others‘ (supra). (11) The Supreme Court in the case of Steel Authority of India Ltd. Vs. State cf Orissa and othersz (supra) had dealt with a similar situation though not identical. The matter related to the Constitutional validity of Section 13-AA of the Orissa Sales Tax Act, 1947 (as replaced in 1993). Section 13-AA as it originally stood was struck down by the High Court of Orissa in Brajendra Mishra Vs. State of Orissa7. The Orissa High Court struck down the original Section 13-AA since it did not provide any mechanism to exclude a transaction from its purview even if, uitimately, the transaction was not at all liable to the levy of sales tax. The above decision of the High Court of Orissa was accepted by the State and Section 13-AA was replaced on October 4, 1993 with certain modifications. The re~enacted Section 13—AA read as follows: WV “13AA. Deduction of tax at source from the payment to works contractors.- (1) Notwithstanding anything contained in section 13 or any other law or contract to the contrary, any person responsible for paying any sum to any contractor (hereinafter referred to in this section as the ‘deducting authority‘) for carrying out any works contract, which involves transfer of property in goods, in pursuance of a contract between the contractor and — (a) Centrai Government or any State Government, Of (b) any local authority, or (c) any authority or corporation estabtished by or under a statute, or 7. (1994) 92 STC 17(Orissa) ~‘gx 100 10 (d) any company incorporated under the Companies Act. 1956 (1 of 1956) induding any State or Central Government undertaking, or (e) any co-operetive society or any other association registered under the Societies Registration act, 1860 (21 of 1860). shaii, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheques or draft nor any other mode, whichever is earlier, deduct an amount towards saies tax equal to four per cent of such sum in respect of the works contract, if the value of the works contract exceeds rupees one iakh. (2) While making deduction as referred to in sub- section (1), the deducting authority shall grant a certificate to the contractor in the form prescribed and shali send a copy thereof to the Sales Tax Officer within whose jurisdiction the works contract is executed. (3) The amount deducted from the bills or invoices shall be deposited into the Government treasury within one week from the date of deduction in such form or challan as may be prescribed. ’ ‘ (4) Such deposit into the Government treasury shall be adjusted by the Sales Tax Officer towards the sales tax liability of the contractor and would also constitute a good and sufficient discharge of the liability of the deducting authority to the contractor to the extent of the amount deposited. (5)(a) Where, on an application being made by the contractor in this behalf, the Commissioner is satisfied that any works contract of the nature referred to in sub-section (1) involves both transfer of property in goods and labour or service, or involves only labour of service and, accordingly, justifies deduction of tax on a part of the sum in respect of 11 101 the works contract or, as the case may be, justifies no deduction of tax, he shatl, after giving the contractor a reasonable opportunity of being heard, grant him such certificate as may be appropriate, in the manner prescribed : Provided that nothing in the said certificate shaii affect the assessment of the sales tax Iiability of the contractor under this Act. (b) Where such a certificate is produced by a contractor before the deducting authority, until such certificate is cancelled by the Commissioner, the deducting authority shall either make no deduction of tax or make the deduction of tax as the case may be, in accordance with the said certificate. (6) lf any person contravenes the provisions of sub-section (1) or (2) or (3) or of clause (b) of sub-section (5), the Sales Tax Officer shall, after giving him an opportunity of being heard, by an order in writing impose on such person penalty not exceeding twice the amount required to be deducted and deposited by him into Government treasury.” The Constitutional validity of the re-enacted section 13AA was challenged before the Supreme Court. The Supreme Court placing reliance on its earlier judgment in the case of Bhawani Cotton Mitts Ltd. Vs. The State of Puniab and anothera (supra) whi!e striking down Section 13AA of the Orissa Sales Tax Act, 1947 (as replaced in 1993) being beyond the purview of the Orissa State Legislature was pleased to observe thus: “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 purpose of the deduction neither the owner nor the 12 102 Commissioner-who issues to the contractor a certmcate 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 of 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 contacts 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". (12) ln the case of Nathpa Jhakri Jt. Venture Vs. State of Himachal Pradesh and others" (supra), the Supreme Court following th judgment in the case of Steel Authority of lndia Ltd. Vs. State of Orissa and othersz (supra) struck down Section 12-A of the Himachal Pradesh General Sales Tax Act, 1968. Section 12-A of the said Act provided for deduction of an amount from the bills or invoices of the works contractors purporting to be tax payable towards transfer of goods involved in works contract. The Himachal Pradesh High Court had taken the view that the relevant amount is the valuable consideration payable for the transfer of property in goods and not the entire value or consideration for the entire works contract and what was directed to be deducted is only an amount not exceeding 4% as may be prescribed purporting to be a part or whole of the tax payable on such sales which would necessarily mean tax payable under the charging provisions of the Act. Thus, the Himachal Pradesh High Court had upheld the validity of Section 12-A on the ground e 13 103 that “all the payments being made in respect of an works contract executed" means and refers only to the payments on account of valuable consideration payable for the transfer of property in goods and not other payments. The Himachal Pradesh High Court further held that Section 12~A did not enable any person to deduct any amount other than what was contemplated by the section and, therefore, it did not suffer from any invalidity. The Supreme Court while disapproving the above reasoning of the High Court held as follows : “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 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 contract 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.Sfate of PLmjab (1967) 20 STC 290 (SC) ; (1967) 3 SCR 577. Further, there is no provisionlfor certification of the extent of the deduction that can be made by