2010 (10) TMI 942 - HC - VAT and Sales Tax

Interpreting Sales Tax Laws: Tax Deduction on Works Contracts Limited to Taxable Turnover

Larsen & Toubro Limited Versus The State of Haryana and others

The court held that statutory provisions in the Sales Tax laws of Punjab and Haryana mandating deduction of tax at source from payments to contractors for ... 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 challenged Held that:- Impugned provisions for deduction of tax at source will apply only to the taxable turnover i.e. after deducting service component and turnover relating to sales outside State, in the course of inter-State sales or in the course of import. The petitioner will give declaration in respect of such payments to the persons making the payment with a copy to the concerned assessing authority. This will be without prejudice to the provisions of assessment, levy of interest, penalty, recovery and all other statutory provisions. This arrangement will continue till any other appropriate arrangement is worked out by the States of Punjab and Haryana Further directed that pending assessments upto the year 2009-10, may be finalized within six months from the date of receipt of a copy of this order and with regard to assessment for the year 2010-11, a provisional assessment be made relating to TDS amounts within the same period Issues Involved:1. Validity of statutory provisions in Sales Tax law in Punjab and Haryana for deduction of tax at source from payments made to contractors for works contracts.2. Competence of State Legislature to enact provisions for deduction of tax at source without limiting it to taxable turnover.3. Mechanism for ascertaining taxable turnover and excluding non-taxable components like service elements and inter-state sales.Detailed Analysis:Issue 1: Validity of Statutory Provisions in Sales Tax LawThe challenge in all petitions was against the statutory provisions in the Sales Tax law of Punjab and Haryana, which mandated the deduction of tax at source from payments made to contractors for works contracts involving the transfer of property in goods. The main objection was that the deduction was based on a percentage of the total payment, which did not necessarily represent taxable turnover. The petitioners argued that the entire payment could not be considered taxable turnover due to components like service elements in composite works contracts and turnovers from inter-state sales, sales outside the State, or sales in the course of import.Issue 2: Competence of State LegislatureThe court referred to the judgments of the Hon'ble Supreme Court in Steel Authority of India Limited v. State of Orissa and others and Rapti Commission Agency v. State of UP and others. These judgments established that State Legislatures could not levy sales tax on inter-state sales, outside sales, or sales in the course of import. The court noted that the impugned provisions were beyond the powers of the State Legislature to the extent they mandated the deduction of tax from non-taxable turnovers. The court highlighted that the provisions should be precisely drafted to ensure no tax is levied on non-taxable components.Issue 3: Mechanism for Ascertaining Taxable TurnoverThe court examined the statutory provisions of the Haryana VAT Act, 2003, and the Punjab VAT Act, 2005, along with their respective rules. It was noted that neither Act provided a mechanism for excluding non-taxable components from the total payment. The court emphasized the need for a mechanism to ascertain taxable turnover, excluding service components and turnovers from inter-state sales or sales outside the State. The court referred to the clarification issued by the Financial Commissioner of Haryana and the proposed amendments in Punjab as steps towards addressing this issue.Conclusion:The court concluded that the impugned provisions for deduction of tax at source should apply only to the taxable turnover, i.e., after deducting the service component and turnovers relating to sales outside the State, inter-state sales, or sales in the course of import. The petitioner was required to provide a declaration of such payments to the person making the payment with a copy to the concerned assessing authority. This arrangement would continue until an appropriate mechanism was developed by the States of Punjab and Haryana. The court directed that pending assessments up to the year 2009-10 be finalized within six months, and provisional assessments for the year 2010-11 be made within the same period.The petitions were disposed of accordingly.