State taxing power and tax deduction at source in works contracts cannot extend to constitutionally excluded sales.

Section 13-AA of the Orissa Sales Tax Act, as amended from 4 October 1993, was analysed as a tax deduction at source mechanism for works contracts, but it did not exclude amounts attributable to inter-State sales, sales outside the State, or sales in the course of import. On that basis, the provision was considered to travel beyond the State Legislature's taxing competence under the constitutional scheme governing State sales tax. The owner penalised for non-deduction was also held to have standing to challenge the provision because penal consequences were imposed directly on it under the impugned law. The amendment was therefore struck down and amounts collected under it were directed to be refunded.

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Issues: (i) Whether section 13-AA of the Orissa Sales Tax Act, as amended with effect from 4 October 1993, was within the legislative competence of the State Legislature when it required deduction at source from payments to works contractors without excluding amounts relatable to inter-State sales, outside sales, or sales in the course of import; (ii) Whether the owner who was subjected to penalty for non-deduction had locus to challenge the validity of the provision.

Issue (i): Whether section 13-AA of the Orissa Sales Tax Act, as amended with effect from 4 October 1993, was within the legislative competence of the State Legislature when it required deduction at source from payments to works contractors without excluding amounts relatable to inter-State sales, outside sales, or sales in the course of import.

Analysis: The taxing power under entry 54 of List II, read with the constitutional scheme in articles 246, 286 and 366(29A)(b), extends only to sales or purchases within the State and not to transactions taking place outside the State or in the course of import. The impugned provision required deduction of tax at source on payments made under works contracts involving transfer of property in goods, but it did not provide any mechanism for excluding the value referable to inter-State sales, outside sales, or import sales. The certificate machinery under sub-section (5) was confined to determining whether the contract involved goods plus labour or service, or only labour or service, and did not address constitutional exclusions from State taxing power. A provision that effectively compelled deduction on amounts beyond the State's taxing competence could not be sustained.

Conclusion: The provision was beyond the legislative competence of the Orissa State Legislature and was invalid.

Issue (ii): Whether the owner who was subjected to penalty for non-deduction had locus to challenge the validity of the provision.

Analysis: The challenge was not confined to the contractor's private entitlement to the deducted money. The owner was directly aggrieved because penalty had been imposed upon it for alleged contravention of the deduction requirement. A person exposed to penal consequences under an invalid statutory provision has sufficient standing to question its legality.

Conclusion: The owner had locus to challenge the validity of the provision.

Final Conclusion: The statutory amendment was struck down, the appeals succeeded, and the amounts collected under the invalid provision were directed to be refunded.

Ratio Decidendi: A State cannot, under the guise of tax deduction at source in a works contract, require deduction on amounts attributable to transactions that lie outside its constitutional taxing power.

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