Works contract tax deduction must be confined to taxable turnover; excess collection cannot extend to constitutionally exempt components.

A tax deduction at source mechanism for works contract payments must stay within the charging provision and cannot operate on constitutionally exempt or non-taxable components. Section 106 of the Meghalaya VAT Act was treated as a machinery provision ancillary to the levy on taxable turnover, so deduction could not be made on the gross contract value where labour, exempt sales, inter-State sales, sales outside the State, and import or export sales are excluded. To preserve validity, the provision was read down so that deduction applies only to taxable turnover, with excess deduction refundable and any shortfall recoverable in accordance with law.

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Issues: (i) Whether section 106 of the Meghalaya Value Added Tax Act, 2003, which requires deduction of tax at source on works contract payments at 12.5 per cent, was within the legislative competence of the State and consistent with article 286 of the Constitution of India and the governing sales tax limitations; (ii) Whether the provision could be sustained only by reading it down so that deduction at source is confined to the taxable turnover of the works contract, with consequential refund or recovery directions.

Issue (i): Whether section 106 of the Meghalaya Value Added Tax Act, 2003, which requires deduction of tax at source on works contract payments at 12.5 per cent, was within the legislative competence of the State and consistent with article 286 of the Constitution of India and the governing sales tax limitations?

Analysis: Section 106 was treated as an ancillary or machinery provision to the charging scheme under section 5 of the Act. The charging provision permits levy only on taxable turnover after excluding exempt sales, inter-State sales, sales outside the State, import and export sales, and labour and similar charges in works contracts. The Court held that a deduction-at-source mechanism cannot operate beyond the charging provision or collect tax on amounts that are constitutionally immune from State taxation. In view of article 286, article 366(29A)(b), entry 92A of List I, and the principles governing works contracts, the machinery provision could not authorize deduction on the gross value of the works contract irrespective of the constitutionally excluded components.

Conclusion: The provision was not unconstitutional in its entirety, but it could not validly operate so as to collect tax beyond the taxable turnover.

Issue (ii): Whether the provision could be sustained only by reading it down so that deduction at source is confined to the taxable turnover of the works contract, with consequential refund or recovery directions?

Analysis: To preserve the provision from invalidity, the Court harmonised section 106 with section 5 by reading into section 106(2) the requirement that deduction at source be made only from the taxable turnover of the works contract. This construction ensured conformity with the constitutional limits on State taxing power and with the deductions mandated for works contracts. The Court further directed that excess tax already deducted be refunded with admissible interest, and that any shortfall may be recovered in accordance with law.

Conclusion: Section 106 was upheld as intra vires, but only after being read down to apply to taxable turnover alone, with refunds of excess deduction and recovery of deficiency as per law.

Final Conclusion: The batch of writ petitions succeeded only to the extent of securing a restricted construction of the impugned provision and corresponding fiscal relief, while the statutory provision itself survived constitutional challenge.

Ratio Decidendi: A tax deduction at source provision relating to works contracts, being only machinery in nature, must conform to the charging provision and cannot authorise collection on constitutionally exempt or non-taxable components; where necessary, it may be read down to preserve validity.

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