No-deduction certificate requires scrutiny of goods and labour components in works contracts before any refusal.

An application for a no-deduction certificate under section 13-AA(5)(a) read with rule 37-D must be decided by examining whether the works contract is wholly labour or service oriented, or whether it combines transfer of property in goods with labour or service. The authority must scrutinise the contract documents and, where components are severable, determine the proper extent of deduction rather than refusing relief on a blanket finding that the contract is not entirely labour-based. The decision on the certificate must be rational and judicial, and the certificate does not determine the final tax liability, which remains open for assessment.

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Issues: Whether, on an application under section 13-AA(5)(a) read with rule 37-D, the authority was required to examine whether the works contract involved both transfer of property in goods and labour or service, and to determine the extent of deduction of tax at source, instead of rejecting the request for a no-deduction certificate on a broad finding that the contract was not wholly labour-oriented.

Analysis: Section 13-AA(5)(a) obliges the authority, on a contractor's application, to decide whether the works contract involves only labour or service, or involves both transfer of property in goods and labour or service, and to grant the appropriate certificate accordingly. Rule 37-D and Form XI-C contemplate scrutiny of the contract documents, including the material component and the labour/service component, so that the authority can determine whether no deduction is justified or whether deduction is required only on part of the contractual sum. The determination must be made on a rational and judicial basis; a blanket refusal without examining the segregable components of the contract is not in accordance with the statutory scheme. The proviso to section 13-AA(5)(a) makes it clear that issuance of such certificate does not conclude or affect the final assessment of tax liability.

Conclusion: The rejection of the application for a no-deduction certificate was unsustainable, and the matter had to be reconsidered by the competent authority in accordance with the statutory provisions.

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