Deduction at source under works contracts cannot reach constitutionally protected sales beyond State taxing power

Section 35 of the Chhattisgarh Vanijyik Kar Adhiniyam, 1994 was considered beyond the State Legislature's taxing competence because it required deduction at source from works-contract payments without any mechanism to exclude turnover from inter-State sales, outside sales, or sales in the course of import. The provision was treated as a recovery machinery linked to the levy, but it could not validly operate on amounts referable to transactions the State had no power to tax. The earlier contrary view was found not binding for overlooking controlling authority, and the provision was struck down as unconstitutional, with refund stated to follow.

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Issues: Whether section 35 of the Chhattisgarh Vanijyik Kar Adhiniyam, 1994 was constitutionally valid, and whether the provision could require deduction at source from payments under works contracts without excluding turnover relating to inter-State sales, outside sales, or sales in the course of import.

Analysis: The power of the State to levy sales tax is confined by the Constitution and by the principles governing inter-State trade, outside-State sales, and import sales. A provision that obliges deduction at source from payments made under works contracts, without providing any mechanism to exclude the value of transactions beyond State taxing power, operates on sums that may include non-taxable components. The provision was treated as a recovery mechanism linked to the charging levy, and once the State lacked competence to tax the excluded transactions, the machinery for collecting an amount referable to them could not be sustained. The earlier contrary view was held not binding as it had overlooked controlling authority on the point.

Conclusion: Section 35 was held unconstitutional and beyond the legislative competence of the State Legislature. The challenge succeeded and the assessee was entitled to refund of the amount collected under the provision.

Final Conclusion: The writ petition was allowed and the impugned deduction-at-source provision was struck down for transgressing the State's taxing power over works contracts involving constitutionally protected sales.

Ratio Decidendi: A State cannot, by a deduction-at-source machinery provision connected to works contracts, require collection of tax on turnover that includes inter-State, outside-State, or import sales beyond its legislative competence.

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