TaxTMI 
TaxTMI 
1996 (5) TMI 392
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.... its registered office at New Delhi and branch at Gwalior in the State of M.P. The petitioner-company amongst other activities undertakes works contract. The petitioner-company is a dealer registered under the M.P. General Sales Tax Act, 1958 (since repealed) and is consequently registered dealer under the M.P. Commercial Tax Act, 1994 (hereinafter referred to as "the Act of 1994"). The respondent No. 3-Gas Authority of India Ltd. is a Government company and is the Government of India Undertaking. The respondent No. 3 awarded works contract to the petitioner-company for laying of pipeline system and other incidental works at Vijaypur, district Guna. The value of the contract is Rs. 57,05,80,500 approximately. The contract also provides for the material involved at Rs. 5,00,79,240 which works out to 9.83 per cent of the total value. The rest of the amount is for labour and service charges. The petitioner-company commenced the work and submitted its seventh running bill on March 15, 1996. Under this bill, the petitioner-company had to receive a sum of Rs. 5,62,75,940 approximately. It is alleged that the State Legislature has enacted the Commercial Tax Act, 1994, repealing the M.P....
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.... of the provisions of the Act of 1994. 6.. Shri V.S. Dabir, learned counsel for the petitioner, has submitted that section 35 of the Act is beyond the competence of the State Legislature. It is submitted that the tax shall be on sale or purchase of goods not liable to tax and on labour charges or other items mentioned. It is contended that the provision is without guidelines. It is compulsory exaction of money under articles 19(1)(g), 301, 265, 366(29A) and 286(3) of the Constitution of India. It is also contended that this amounts to double taxation. 6-A. In order to appreciate the contentions raised by the learned counsel for the parties, it is necessary to refer to the relevant provisions of the Act bearing on subject. Section 2(w) of the Act defines "taxable turnover", which reads as under: "Section 2(w): 'taxable turnover' in relation to any period means that part of a dealer's turnover for such period which remains after deducting therefrom (1) the sale price of goods declared tax-free under section 15 or exempted in whole under section 17; (ii) the sale price of goods mentioned in Parts II to VII of Schedule II which are in the nature of tax-paid goods i....
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....tor towards the value of the contract to the extent of the amount specified in the receipt. (4) Where any payment of any amount is made by a person under subsection (2) on behalf of a contractor such payment shall constitute a good and sufficient discharge of the liability of the contractor to pay tax in respect of the sale of the goods in the course of execution of the works contract from the payment of the value whereof such amount has been deducted under sub-section (1) and such amount shall be adjusted towards the tax payable by the contractor on the sale of such goods. (5) Where a person contravenes the provisions of sub-section (1) or subsection (2) the Commissioner shall impose upon such person by way of penalty an amount which shall be twenty five per cent of the amount required to be deducted under sub-section (1). (6) Any amount, a person is required to deduct under sub-section (1) and to pay it into a Government treasury under sub-section (2) or the penalty payable under sub-section (5) remains unpaid shall be recoverable as an arrear of land revenue." Section 79 of the Act which lays down that certain goods are not liable to tax, reads as under: "S....
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....ceeded its jurisdiction. It is a sort of advance tax so that the tax could be recovered right from the inception without waiting till the whole transaction of the works contract is completed. In the works contract, it is true that there is a component of the labour and there are certain sales and purchases made in the course of inter-State trade or commerce or from the registered dealer, but that are not being taxed. In fact, what is being taxed is sale and purchase of goods and that is only a mode provided in the beginning and it is subject to the final adjustment at the end of the whole works contract. It is a machinery provision and it could have been provided keeping in view the fact that certain sales and purchases which are exempted or which are not liable to tax under the Act should have been better advised to leave including the labour charges. But by this, it does not mean that the State Legislature is not competent to incorporate section 35 of the Act. In fact, primarily, it is a machinery provision for the purpose of collection of tax and incidentally, it may have a component of the labour charges or certain sales which are not liable to tax or certain purchases which ar....
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....or has undertaken to supply shall, at the time of credit of such sum to the account of the sub-contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income-tax on income comprised therein. (3) No deduction shall be made under sub-section (1) or sub-section (2) from- (1) any sum credited or paid in pursuance of any contract the consideration for which does not exceed twenty thousand rupees; or (ii) any sum credited or paid before the 1st day of June, 1972; or (iii) any sum credited or paid before the 1st day of June, 1973, in pursuance of a contract between the contractor and a co-operative society or in pursuance of a contract between such contractor and the sub-contractor in relation to any work (including supply of labour for carrying out any work) undertaken by the contractor for the co-operative society. (4) Where the assessing officer is satisfied that the total income of the contractor or the sub-contractor justifies the deduction of income-tax at any lower rate or no deduction of income-tax, as the case may be, the assessing officer....
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....t had been provided in the works contract separately perhaps this situation would not have arisen. In a composite works contract, such kind of segregation is not possible. Therefore, for overall purpose for recovering of the tax at source, the total turnover is taken into consideration. But, at the time of final determination of the liability of tax, the amount which is not liable to tax, shall not be taxed. It is misconceived to contend that under section 35 certain items which are not subject to tax, are being taxed like labour charges or other items which are not liable to tax. It is only an approximate amount of tax which is worked out on the basis of overall turnover that being the composite amount of total works contract at the rate of 2 per cent. If the provisions similar to sub-sections (4) and (5) of section 194-C of the Income-tax Act had been provided, perhaps this argument would not have been available, though a notification dated April 12, 1996, has been issued by the State Government under section 17 of the Act of 1994, which will be referred to at the relevant time, mitigating the hardship. 9.. Shri V.S. Dabir, learned counsel for the petitioner has invited our....
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....mport or export." 10.. The gist of the matter is that section 35 is only a machinery provision and it is not a charging section. The charging section is section 9 of the Act. This machinery provision is for the purpose of securing sales tax and for that purpose a general principle has been adopted that 2 per cent of the total amount of works contract should be deducted subject to final determination, but that does not mean that the State is going to tax the labour charges or sale which is not liable to tax, under the provisions of the Act of 1994. This is only a simple yardstick adopted by the State on a broad basis as an advance deduction at source, but that does not mean that the incidence of tax will be on the items which are not liable to tax. This is only a broad assessment for securing the advance tax at source and subject to final determination by the assessing authority at the appropriate time. At that time, it is open for the assessee to show that certain items which are not liable to tax then there is no reason why the authority shall deny the benefit which the assessee is legitimately entitled to. Simply because, section 35 does not make any distinction of t....
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....he conditions and restrictions imposed by section 15 on goods declared to be of special importance in interState trade or commerce under section 14 of the Central Sales Tax Act. In view of the non obstante clause in sub-section (3) of section 5, the provisions of subsection (1) are not applicable to works contracts and sub-section (3) alone is applicable. A comparison of sub-section (3) of section 5 read with section 2(t) and sub-section (1) of section 5 read with section 2(s) would indicate that in relation to works contracts the Legislature has made a departure in the matter of chargeability of the tax and by using the expression 'turnover' instead of 'taxable turnover' in section 5(3) it has enlarged the field of taxability. The proviso to section 5(3) does not oblige the rule-making authority to frame a rule allowing deductions for the turnover of the amount of proceeds of sale of goods on which no tax is leviable under the Act so as to exclude the abovementioned sales from levy of tax. The rule-making authority would not be contravening the mandate of the statute if it does not allow deduction of the amount of proceeds for sale of goods on which no tax is leviable under the Ac....
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....the charging section is section 9 of the Act, which reads as under: "Section 9. Levy of tax.-(1) Subject to provisions of sub-section (2) and sub-section (3), the tax payable by a dealer under this Act shall be levied on the taxable turnover relating to goods specified in Schedule II at the rate mentioned in corresponding entry in column (3) of the said Schedule. (2) Subject to such restrictions and conditions as may be prescribed and to the provisions of sub-clause (iii) of clause (w) of section (2),- (a) the tax payable by a registered dealer on the sales of any goods specified in Schedule II except the goods specified in Schedule III, to another registered dealer for use by him inside the State- (1) as raw material or as incidental goods, in the manufacture or in the processing of goods or in the mining of goods, declared tax-free under section 15 or exempted in whole under section 17 and sold by him- (a) in the State of Madhya Pradesh, or (b) in the course of inter-State trade or commerce, or (c) in the course of export out of the territory of India, or (ii) in the generation or distribution of electrical energy or and other form of power; shall be le....
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....estrictions and conditions shall be by way of tax in respect of goods other than declared goods and by way of penalty in respect of declared goods." This section has not been amended and no provision has been made for the works contract; therefore, the incidence of taxation under the charging section remains as it is and it has been clearly mentioned that what is taxable is the taxable turnover as defined in section 2(w). Therefore, the charging section has not been touched under this Act for works contract. The other provisions of the Act have not been in any manner affected and it is only section 35 which is purely a machinery provision which has been amended just to secure the tax at source. Therefore, it cannot be said that section 35 of the Act is in any way ultra vires of the provisions of the Act or the Constitution of India. In fact, in the case of Gannon Dunkerley [1993] 88 STC 204 (SC); (1993) 1 SCC 364, the charging section was sought to be amended in the matter of works contract; therefore, their Lordships found that it was invalid and it was accordingly declared ultra vires. But, in the present case, the core provisions, i.e., incidence of taxation is concerned, ....
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..... 13. Shri Anoop Choudhary, learned Advocate-General appearing on behalf of the State, has invited our attention to various decisions of the honourable High Courts in which similar provisions have been upheld in Tirath Ram Ahuja Limited v. State of Haryana [1991] 83 STC 523 (P&H); Geeta Prasad Singh and Co. v. State [1986] 63 STC 337 (Pat); Builders Association of India v. State of Bihar [1992] 85 STC 362 (Pat) [FB] and Builders Association of India v. State of Kerala [1995] 98 STC 490 (Ker). 14.. In Brajendra Mishra v. State of Orissa [1994] 92 STC 17 (Orissa) and V.K. Singhal v. State of U.P. [1995] 97 STC 355 (All.), the Orissa/Allahabad High Courts have taken a different view in the matter. The Orissa High Court has, of course, taken the view that section 13-AA of the Orissa Sales Tax Act, 1947, which provides for deductions at source, has to be struck down, and it was observed: "........If section 13AA is examined from the aforesaid standpoint, there cannot be two opinions that it does not provide any mechanism to exclude a transaction from its purview, even if ultimately the transaction is not at all liable to levy of sales tax. In other words, even in ....
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....y provisions. It is true the court will be very slow to strike down the provisions of the Act unless there are compelling reasons to come to the conclusion that the provisions lack statutory competence, but not on the ground that it may operate harshly to individual or that some provisions could have been framed in better way. It is not necessary to examine all the cases cited by the learned counsel as there is no such challenge before us. The challenge before us is competence of the State Legislature to enact section 35 and we have held that it is within the competence of the State Legislature and that being a machinery provision, it is not in conflict with any of the charging section of the Act; therefore, it does not transgress the limit. 17. Before parting with the case, we may mention that the State Government has issued a notification under section 17 of the Act and has provided a machinery, which reads as under: "GOVRNMENT OF MADHY PRADESH Commercial Taxes Department Notification No. A-5-4-96/ST/V(14) Bhopal, dated 12-4-1996. In exercise of the powers conferred by section 17 of the Madhya Pradesh Vanijyik Kar Adhiniyam, 1994....
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....any, etc.) ................................................... 2. Registration No. under the M.P. Commercial Tax Act, 1994, (if any). ................................................... 3. Accounting year (give period) .................................................. 4. Purchase order/contract order No. and date (copy enclosed). .................................................. 5. Name and address of the purchaser/ contractor. ................................................... 6. Value of the purchase order contract .................................................. 7. Name and designation of the person to whom the certificate is to be issued. ................................................. 8. Reasons for making the application for deduction of the amount at lesser rate/zero rate. ................................................ I hereby declare that the above statements are true to my knowledge and belief. Date.................. Signature........................................... Place.................. Name in block letters with status............................................ (Strike out whichever is not app....