TDS on works contracts cannot extend beyond State taxing power; Andhra Pradesh VAT provisions were held unconstitutional.

Sections 22(3) and 22(4) of the Andhra Pradesh VAT Act, 2005 were found unconstitutional because they required tax deduction at source on gross payments under works contracts without ensuring that the underlying transaction was within the State's taxing power. The court applied the principle that a deduction mechanism cannot authorise collection on labour-only contracts, non-taxable transfers of property in goods, or goods involved in inter-State trade, outside sales, or export. On that basis, the provisions were held beyond the legislative competence of the State and the writ petitions were allowed.

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Issues: Whether sections 22(3) and 22(4) of the Andhra Pradesh Value Added Tax Act, 2005, which require deduction of tax at source from payments made under works contracts, are constitutionally valid and within the legislative competence of the State.

Analysis: The challenge was examined in the light of the principle that a State cannot, under the guise of tax deduction at source, levy or collect tax on transactions beyond its taxing power. The impugned provisions operated on the gross amount payable under works contracts without taking account of the possibility that the contract may involve only labour or service, may not involve a taxable transfer of property in goods at all, or may involve goods purchased in the course of inter-State trade, outside sales, or export. The reasoning followed the controlling principle that a deduction mechanism is unconstitutional if it authorises collection without regard to whether the underlying transaction is within the State's sales tax jurisdiction.

Conclusion: Sections 22(3) and 22(4) were held unconstitutional and beyond the legislative competence of the State of Andhra Pradesh, and the writ petitions were allowed.

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