Deduction at source on gross works contract value held unconstitutional where it captured non-taxable inter-State and import-export sales.

Section 35 of the Madhya Pradesh Commercial Tax Act, 1994, which required deduction at source from the gross value of a works contract, was beyond the State Legislature's competence because it operated without excluding turnover attributable to sales outside the State, inter-State sales, or sales in the course of import and export. The existence of a certificate mechanism under section 35A did not cure the defect, since the levy still applied to the full contract value and captured transactions outside State taxing power. The provision was therefore treated as ultra vires the Constitution, and the challenge to its validity succeeded.

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Issues: Whether section 35 of the Madhya Pradesh Commercial Tax Act, 1994, which required deduction at source from the value of a works contract, was valid when the deduction could include the value of sales outside the State, inter-State sales, and sales in the course of import and export.

Analysis: Section 35 mandated deduction at source at the rate of two per cent from the value of a works contract exceeding the prescribed threshold and contained no provision for excluding turnover relatable to sales outside the State or to transactions in the course of inter-State trade, import, or export. Although section 35A provided a mechanism for furnishing a certificate to obtain a lower deduction, the statutory scheme still operated on the gross value of the contract and did not cure the constitutional defect identified by the Supreme Court in later decisions. In view of the principles laid down on the limits of State taxing power over transactions not taxable under the State Act, the earlier view upholding section 35 could no longer stand.

Conclusion: Section 35 was held to be beyond the competence of the State Legislature and ultra vires the Constitution, in favour of the assessee.

Final Conclusion: The challenge to the validity of the deduction-at-source provision succeeded, and the Court treated the impugned provision as unconstitutional, leaving no need to examine the remaining contention.

Ratio Decidendi: A provision requiring deduction at source on the gross value of a works contract is unconstitutional if it authorises collection from turnover that includes transactions beyond the State's taxing competence and does not exclude such non-taxable sales from its operation.

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