Case: Steel Authority of India Ltd Vs. State of Orissa &amp; Ors. etc. etc

2. Section 13AA as it was then read, was struck down by the High Court of Orissa on 28th April, 1993 in the case of Brajendra Mishra v. State of Orissa & others, 1994(92) STC 17. The High Court held that Section 13AA did not provide any mechanism to exclude a transaction from its purview even if, ultimately, the transaction was not at all liable to the levy of sales tax.The decision of the High Court was accepted and Section 13AA was replaced on 4th October, 1993 in the following terms, which are now under challenge.Under the terms of Section 13AA, as presently enacted, the appellant deducted sales tax at source at the rate of four per cent in respect of payments to Mukund pertaining to (d) and (e) above. It did not deduct tax at source in respect of payments under items (a), (b) and (c) for the reason that they were in respect ofsales, outside sales and import sales and, therefore, outside the purview of the Orissa Sales Tax Act. The Commercial Tax Officer, Rourkela, did not accept this stand of the appellant and issued to it notices to show cause why penalty proceedings should not be initiated in respect of the Assessment Years6. The notices were challenged by the appellant by a writ petition filed in the High Court of Orissa. At an interim stage, the authorities were permitted to proceed with the hearing on the show cause notices but the final order thereon was made subject to the result of the writ petition. Thereafter, the High Court ordered that no coercive steps for recovery should be taken against the appellant. Pursuant to the show cause notices, the Sales Tax Officer imposed penalties upon the appellant for the Assessment Years96 on the ground that the appellant should have deducted four per cent of the totality of its payments to Mukund. The penalties, in the sum of Rs. 26.98 crores imposed by the order dated 11th November, 1997, for the Assessment Years6, were challenged by the appellant in a fresh writ petition. On the earlier writ petition the order under challenge in the appeal was passed. It held that Section 13AA was not ultra vires the Constitution. On the second writ petition an order of deposit of fifty per cent of the demand was made, and that order is separately challenged.6. Upon the petition for leave to appeal to this Court, recovery of tax and penalty was stayed pending the disposal of the appeal.

Reasoning: 8. With this background, we turn to analyse Section 13AA as it presently stands. By reason of(1) thereof, the person responsible for paying any sum to any contractor for carrying out any works contract which involves the transfer of property in goods (now, for convenience, referred to as the `owner) is obliged to deduct, at the time of credit of that sim to the account of the contractor or payment thereof to him, an amount "towards sales tax equal to four per cent of such sum in respect of the works contract", provided the value of the works contract exceeds rupees one lakh. The deduction, therefore, is towards the sales tax that is payable to the State upon the works contract and it is of four per cent of the value of the works contract.(2) requires the owner to grant to the contractor as certificate in respect of such deduction. By reason of(3), the amount that the owner has deducted must be deposited by him into the Government treasury within a week of the deduction. By reason of(4), such deposit is required to be adjusted by the Sales Tax Officer towards the sales tax liability of the contractor and it constitute good and sufficient discharge of the liability of the owner to the contractor to make an application to the Commissioner of Sales Tax and if the Commissioner is satisfied thereon that any work contract "involves both transfer of property in goods and labour or service or involves only labour or service and, accordingly, justifies deduction of tax on a part of the sum in respect of the works contract or, as the case may be justifies no deduction of tax, he shall, grant him such certificate as may be appropriate in the manner prescribed." To the extent of the amount mentioned in the certificate the owner must, by reason of5(b), make no deduction of tax. The Commissioner is required only to see whether the works contract involves transfer of property in goods and labour or service or only labour or service. If it involves only labour or service, he must certify that no deduction of tax shall be made and if it involves both transfer of property in goods and labour or service, he shall certify the deduction of a part of the sum payable by the owner to the contractor.5(a) takes no account of the fact that event if a works contract involves both transfer of property in goods and labour or service, State sales tax may not be payable upon the entire value ascribable to the transfer of property in goods for the reason that it is in the course ofsales, outside sales or sales in the course of export; nor is such account taken elsewhere in Section 13AA.4. The form of the certificate which is referred to in(5) of Section 13AA is to be found in Formof the Orissa Sales Tax Rules, Part I thereof is the form for the application for the grant of a certificate and Part II is the form of the certificate itself. Both the forms make it clear that all that the Commissioner is required to look at is whetherany labour or service is involved in the works contract.on (6) of Section 13AA, owner who acts contrary to the provisions of(1), (2), (3) and (5)(b) thereof is liable to "penalty not exceeding twice the amount required to be deducted and deposited ......" The owner, therefore, should he contraveneThere can be no doubt, upon a plain interpretation of Section 13AA, 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 13AA(5) is entitled to take into account the fact that the works contract involves transfer of property in goods consequent upon of ansale, an outside sale or a sale in the course of import. The owner is required by Section 13AA(1) to deposit towards the contractors 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 ofsales, outside sales or sales in the course of import. There is, in our view, therefore, no doubt that the provisions of Section 13AA are beyond the powers of the State legislature for the State legislature may make no law levying sales tax onsales, outside sales or sales in the course ofcontention ignores the fact that the appellant owner is aggrieved and damnified by the penalty that has been imposed upon it under) for contravention of) of Section 13AA. It has, therefore, the standing to contest the validity of Section13AA 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 tosales, outside sales and sales in the course of import, particularly after the previous Section 13AA 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.