Works contract TDS must be confined to taxable turnover, excluding service components and constitutionally non-taxable sales.

Deduction at source under the Haryana and Punjab value added tax provisions for works contracts was confined to taxable turnover only. The Court applied the constitutional limits on State sales tax power and held that the mechanism could not extend to the service component of a composite works contract or to turnover relating to outside sales, inter-State sales, or sales in the course of import. Earlier Supreme Court rulings on similar provisions were treated as controlling, and the States' proposed clarification or amendment was accepted only to align the deduction regime with those limits.

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Issues: Whether the provisions requiring deduction of tax at source from payments made under works contracts could validly operate on the entire contract value, including amounts attributable to service element and to transactions not taxable by the State, or whether their operation had to be confined to taxable turnover only.

Analysis: The impugned provisions in the Haryana and Punjab value added tax laws authorised deduction from payments made to contractors executing works contracts. The Court applied the principle that the State's taxing power under Entry 54 of List II and the constitutional limitations under Articles 286 and 366(29A) do not permit levy or collection on the service component of a composite works contract or on sales falling outside the State, in the course of inter-State trade, or in the course of import. The earlier Supreme Court rulings on identical or similar provisions were treated as controlling, and the States' proposed clarification or amendment was accepted as a mechanism to conform the deduction provisions to the constitutional limits.

Conclusion: The deduction at source provisions were held operative only in relation to taxable turnover, after excluding the service component and turnover relating to outside sales, inter-State sales, and sales in the course of import.

Final Conclusion: The petitions were disposed of by confining tax deduction at source under the impugned provisions to constitutionally taxable turnover and by directing the States to proceed on that basis until an appropriate mechanism was put in place.

Ratio Decidendi: A statutory deduction-at-source mechanism for works contracts cannot extend beyond the State's taxing power and must be confined to taxable turnover, excluding the service component and turnover not amenable to State sales tax.

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