Full Judgment Text
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PETITIONER:
STEEL AUTHORITY OF INDIA LTD.
Vs.
RESPONDENT:
STATE OFORISSA & ORS. ETC. ETC.
DATE OF JUDGMENT: 25/02/2000
BENCH:
Bharucha, J.
JUDGMENT:
BHARUCHA, J.
Before it was held to be unconstitutional on 28th
April, 1993, Section 13AA of the Orissa Sales Tax Act read
thus :
"13-AA : Deduction of tax at source from the payment
to works contractor -
0) Notwithstanding anything contained in Section 13 or
any other law or contract to the contrary’, any person
responsible for paying any sum to any contractor for
carrying out any works contract in pursuance of a contract
between the contractor and-
(a) Central Government or any State Government, or
(b) any local authority, or
(c) any authority or Corporation established by or
under a statute, or
(d) any Company incorporated under the Companies Act,
1956 (I of 1956) including any State or Central Government
undertaking, or
(e) any Co-operative Society or any other Association
registered under the Societies Registration Act. 1860, (21
of 1860) shall at the time of credit of such sum to the
account of the contractor or at the time of payment thereof
in cash or by issue of a cheque or draft or any other mode.
whichever is earlier, deduct an amount towards sales tax
equal to two pcrcentum of such sum in respect of the works
contra...!: :
Provided that if the value of the works contract does
not exceed rupee one lakh, no such deduction shall be made.
(2) While making deduction as referred to in
sub-section ( I ), the deducting authority shall grant a
certificate to the contractor in the form prescribed and
shall send a copy thereof to the Spies Tax Officer within
whose jurisdiction the woiks contract is executed.
(3) The amount deducted from the Bills or Invoices
shall be deposited into the Government Treasury within one
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week from the date of deduction in such form or challan as
may be prescribed.
(4) Such deposit into the Treasury shall be adjusted
by the Sales Tax Officer towards the sales tax liability of
the Works contractor and would also constitute a good and
sufficient discharge of the liability of the deducting
authority to the conuractor to the extent of the amount
deposited.
(5) If any person contravenes the provisions of
sub-section (1) or sub-section (2) or sub-section (3) of
this Section, the Sales Tax Officer shall. after giving him
an opportunity of being heard, by an order in writing,
impose on such person penalty not exceeding twice the amount
required to be
deducted and deposited by him into Government
Treasury".
Section 13AA. as it was then read. was struck, down
by the High Court of Orissa on 28^ April. 1993 in the case
of Braiendra Mishra vs. State of0rissa& Ors.. [1994] 92
STC 17. The High Court held that Section 13AA did not
provide any mechanism to exclude a transaction from its
purview even if, ultimately; the transaction was not at all
liable to the levy of sales tax. In other words, even in
the case of a pure and simple labour contract or service
contract where the question of sale would not arise, the
person responsible for making any payment to a contractor
had no option but to deduct two per cent of such sum towards
sales tax. Though a transaction which might not be a sale
at all was made liable for levy of sales tax. yet in
respect of that transaction power had been conferred to make
deduction of two per cent from the amount to be paid. In
the absence of any discretion with the authority and in the
absence of any mechanism by which the » contractor could
approach any authority and obtain a certificate to the
effect that the transaction did not amount to a sale, the
deduction of two per cent from the amount could not but be
held to be grossly discriminatory and confiscatory in nature
and. therefore, the same had to be struck down.. The High
Court added that by conferring arbitral, unbridled and
uncanalised powers on the person concerned to deduct two per
cent from the sum
payable to the contractor, irrespective of the
question whether, ultimately, the transaction was liable for
payment of any sales tax at all. could not be held to be a
levy of tax under any valid legal provision. It was true
that the deduction of two per cent under Section 13AA was to
be ultimately adjusted where the transaction in question was
liable for levy of sales tax. but where the transaction was
not atall liable for levy of sales tax. there the question
of adjustment would not arise and. therefore, the deduction
would be confiscatory in character and effect and it could
not be held to be a valid provision within the legislative
competence of the legislature imposing the tax and
authorising the collection thereof. A bare reading of
Section 13AA made it explicitly clear that the amplitude of
the incidence of tax had been widened so as to include
transactions which were outside the sphere of taxation
available to the State legislature under Entry 54 of List II
of the Seventh Schedule to the Constitution. Inasmuch as
even in respect of a purely labour contract or service
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charges. Section 13AA authorised deduction of two per cent
from the bills of the contractor, it could not but be held
to be unconstitutional and void.
The decision of the High Court was accepted and
Section 13AA was replaced on 4^ October. 1993 in the
following terms, which are now under challenge.
’13-AA : Deduction of tax at source from the payment
to works contractors -
(1) Notwithstanding anything contained in Section 13
or any other law or contract to the contrary’, any person
responsible for paying any sum to any contractor
(hereinafter referred to in this section as the "deducting
authority) for carrying out any works contract which
involves transfer of property’ in goods, in pursuance of a
contract between the contractor and -
(a) Central Government or any State Government or
(b) any local authority, or
(c) any authority or Corporation established by or
under a statute, or
(d ) any Company incorporated under the Companies Act
1956(1 of 1956) including any State or Central Government
undertaking, or
(e) any Co-operative Society or any other Association
registered under the Societies Registration Act. 1860 (21
of 1860). shall, at the time of credit of such sum to the
account of the contractor or at the time of payment thereof
in cash or by issue of a cheque or draft or any other mode,
whichever is earlier, deduct an amount towards sales tax
equal to (four percentum) of such sum in respect of the
works- contract. if the value of the works contract exceeds
rupee one lakh.
(2) While making deduction as referred to in
sub-section (1), the deducting authority shall grant a
certificate to the contractor in the form prescribed and
shall send a copy thereof to the Sales Tax Officer within
whose jurisdiction the works-contract is executed.
(’3) The amount deducted from the Bills or Invoices
shall be deposited into a Government Treasury’ within one
week from the date of deduction in such form or challan as
may be prescribed.
(4) Such deposit into Government Treasury’ s’.n.D be
adjusted by the Sales Tax Oilkor towards the SaJes Tax
liability of the contractor and would also constitute a good
and sufficient discharge of the liability of the deducting
authority’ to the contractor to the extent of the amount
deposited. (5)(a) Where, on an application being made by
the contractor in this behalf, the Commissioner is satisfied
that any works contract of the nature referred to in
sub-section (1) involves both transfer of property in goods
and labour or service or involves only labour or service
and. accordingly, justifies deduction of tax on a part of
the sum in respect of the works-contract or, as the case may
be. justifies no deduction of tax, he shall, after giving
the contractor a reasonable opportunity of being ilcard,
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grant him such certificate as may be appropriate, in the
manner prescribed :
Provided that nothing in the said certificate shall
affect the assessment of the sales tax liability of the
contractor under this Act.
(b) Where such a certificate is produced by a
contractor before the deducting authority’, until such
certificate is cancelled by the Commissioner, the deducting
authority shall either make no deduction of tax or make the
deduction of tax as the case may be. in accordance with the
said cetificate.
(6) If any person contravenes the provisions of
sub-section (1) or (2) or (3) or of clause (b) of sub-
section (5), the Sales Tax Officer shall, after giving
him an opportunity of being heard, by an order in writing
impose on such person penalty not exceeding twice the amount
required to be deducted and deposited by him into government
treasury".
The appellant has a steel plant at Rourkela in the
State of Orissa. A vast modernisation programme has been
implemented there. The appellant has entered into contracts
with parties in India and abroad for the design and
engineering of plant and equipment and for the manufacture
of plant, equipment, components, machinery and spares which
will be incorporated into the contracts for erecting the
modernised system and plant. In other words, it has entered
into, inter aha, works contracts.
One of such works contractors was M/s Mukund Iron and
Steel Works Ltd. (hereinafter called the ’Mukund’). The
contract between the appellant and Mukund was for the
design, engineering, manufacture, supply, transportation,
erection, installation, testing and commissioning of a basic
oxygen furnace plant. The value thereof was Rs. 532
crores. According to the appellant, the break-up thereof is
as follows:
"(a) Supply of equipments from States outside Rs. 317
Crores Orissa by way of CST Sales. Central Sales Tax paid
in Non-Orissa States. Both under Section a) and 6(2) of the
CST.
(b) Supply of equipments from other countries Rs. 16
Crores outside India on High Seas Sales basis under Section
5 of the CST Act
(c) Supply of Steel by SAIL Rs. I8 Crores (d) Design.
Engineering and other sendees Rs. 103 Crores (e)
Fabrication, erection, structural. Rs. 78 Crores"
construction, civil construction, etc.
Under tho terms of Section 13AA. as presently
’cnacted the appellant deducted sales tax at source at the
rate of four per cent in respect of payments to Mukund
pertaining to (d) and (e) above. It did not deduct tax at
source in respect of payments under items (a), (b) and (c)
for tile reason that they were in respect of inter-State
sales, outside sales and import sales and, therefore,
outside the purview of the Orissa Sales Tax Act. The
Commercial Tax Officer, Rourkela. did not accept this stand
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of the appellant and issued to it notices to show cause why
penalty proceedings should not be initiated in respect of
the’ Assessment Years 1994-95 and 1995-96. The notices were
challenged by the appellant by a writ petition filed in the
High Court of Orissa. At an interim stage, the authorities
were permitted to proceed with the hearing on the show cause
notices but the final order thereon was made subject to the
result of the writ petition. Thereafter, the High Court
ordered that no coercive steps for recovery should be taken
against the appellant. Pursuant, to the show cause notices,
the Sales Tax Officer imposed penalties upon the appellant
for the Assessment Years 1994-95 and 1995-96 on the
ground that the appellant should have deducted four
per cent of the totality of its payments to Mukund. The
penalties, in the sum of Rs. 26.98 crores imposed by the
order dated 11th November, 1997 for the Assessment Years
1994-95 and 1995-96, were challenged by the appellant in a
fresh writ petition. On the earlier writ petition the order
under challenge in the appeal was passed. It held that
Section 13AA was not ultra vires the Constitution. On the
second writ petition an order of deposit of fifty per cent
of the demand was made, and that order is separately
challenged.
Upon the petition for leave to appeal to this Court,
recovery of tax and penalty was stayed pending the disposal
of the appeal.
By virtue of Entry 54 of List II of the Seventh
Schedule read with Article 246 of the Constitution of India,
the States are empowered to levy taxes on the sale or
purchase of goods, other than newspapers. The Forty- sixth
Amendment to the Constitution introduced, inter alia, clause
(29A)(b) in Article 366 of the Constitution; as a result,
tax on the purchase or sale of goods included a tax "on the
transfer of property in goods (whether as goods or in some
other form) involved in the execution of a works contract".
Article 286(1) of the Constitution states that no law of a
State shall impose. or authorise the imposition of a tax on
the sale or purchase of goods where such sale or purchase
takes place outside the State or in the course of the import
of goods into, or export of goods out of the territory of
India.
Article 286(2) authorises Parliament by law to
formulate principles for determining when a sale or purchase
of goods takes place in any of the ways mentioned in
sub-Article (1). Acting upon this power. Parliament has
set out in Sections 3. 4 and 5 of the Central Sales Tax
Act, 1956 principles for determining when a sale or purchase
of goods can be said to take place in the course of
inter-State. trade or commerce, when a sale or purchase of
goods can be said to take place outside the State and when a
sale or purchase of goods can be said to take place in the
course of import or export. In M/s Gannon Dunkerlev and Co.
& Ors. vs. State of Rajasthan & Ors., (1993) I SCC 364.
this Court has held that it is necessary to exclude from the
value of a works contract the value of goods which are not
taxable by a State in view of Sections 3, 4 and 5 of the
Central Sales Tax Act. 1956. The value of goods involved
in the execution of a works contract has to be dctctmincd
after making these exclusions from the value of the works
contract. With this bad-ground, we turn to analyse Section
13AA as it presently stands. By reason of sub-section (1)
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thereof, the person responsible for paying any sum to any
contactor for carrying out any works contract which involves
the transfer of property in goods (now. for convenience,
referred to as the ’owner’) is obliged to deduct, at the
time of credit of that sum to the account of the contractor
or payment thereof to him, an amount "towards sales tax
equal to four per cent vfsuch sum in respect of the works
contract",
provided the value of the works contract exceeds
rupees one lakh. The deduction, therefore, is towards the
sales tax that is payable to the State upon the works
contract and it is of four per cent of the value of the
works contract. Sub-section (2) requires the owner to grant
to the contractor a certificate in respect of such
deduction. By reason of sub-section (3), the amount that
the owner has deducted must be deposited by him into the
Government treasury within a week of the deduction. By
reason of sub- section (4), such deposit is required to be
adjusted by the Sales Tax Officer towards the sales tax
liability of the contractor and it constitutes good and
sufficient discharge of the liability of the owner to the
contractor to the extent of the amount deposited.
Sub-section (5)(a) permits the contractor to make an
application to the Commissioner of Sales Tax and if the
Commissioner is satisfied thereon that any works contract
"involves both transfer of property in goods and labour or
sendee or involves only labour or sendee and. accordingly,
justifies deduction of tax on a part of the sum in respect
ofthe works contract or, as the case may be justifies no
deduction of tax, he shall, .......... grant him such
certificate as may be appropriate in the manner prescribed."
To the extent of the amount mentioned in the certificate the
owner must, by reason of sub-section 5(b), make no deduction
of tax. The Commissioner is required only to see whether
the works contract involves transfer of property in goods
and labour or service
or only labour or sendee. If it involves only labour
or service, he must certify that no deduction of tax shall
be made and if it involves both transfer of property- in
goods and labour or service, he shall certify the deduction
of a part of the sum payable by the owner to the contractor.
Sub-section 5(a) takes no account of the. fact that even if
a works contract involves both transfer of property in goods
and labour or service. State sales tax may not be payable
upon the entire value ascribable to the transfer of property
in goods for the reason that it is in the course of
inter-State sales, outside sales or sales in the course of
export; nor is such account taken elsewhere in Section
13AA.
The form of the certificate which is referred to in
sub-section(5) of Section 13AA is to be found in Form XI-C
of the Orissa Sales Tax Rules. Part I thereof is the form
for the application for the grant of a certificate and Part
II is the form of the certificate itself. Both the forms
make it clear that all that the Commissioner is required to
look at is whether any labour or service is involved in the
works contract.
Under sub-section(6) of Section 13AA, an owner who
acts contrary to the provisions of sub-sections (1), (2),
(3) and (5)(b) thereof is liable to "penalty’ not exceeding
twice the amount required to be deducted and deposited
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.........." The owner, therefore, should he contravene
sub-section
(1), would be liable to a penalty not exceeding twice
the amount that he should have deducted under that
sub-section.
In Bhawani Cotton Mills Ltd. vs. State of Punjab &
Am-., (1967) 3 SCR 577, this Court said, - "If a person is
not liable for payment of tax at all, at any time, the
collection of a tax from him, with possible contingency of
refund at a later stage, will not make the original levy
valid: because, if particular sales or purchase are exempt
from taxation altogether, they can never be taken into
account, at any stage, for the purpose of calculating or
arriving at the taxable turnover and for levying tax."
There can be no doubt, upon a plain interpretation of
Section 13AA, that it is enacted for the purposes of
deduction at source of the State sales tax that is payable
by a contractor on the value of a works contract. For the
purposes of the deduction neither the owner nor the
Commissioner who issues to the contractor a certificate
under Section 13AA(5) is entitled to take into account the
fact that the works contract involves transfer of property
in good^ consequent upon of an inter-State sale, an outside
sale or a sale in the course of import. The owner is
required by Section 13AA(1) to deposit towards the
contractor’s liability to State sales tax four per cent of
such amount as he credits or pays to the contractor,
regardless of the fact that the value of the works contract
includes the valuer of inter-State sales,
outside sales or sales in the course of import. There
is. in our view, therefore, no doubt that the provisions of
Section 13AA are beyond the powers of the State legislature
for the State legislature may make no law levying sales tax
on inter-State sales, outside sales or sales in the course
of import.
It was contended on behalf of the State that the
appellant, as owner, had no locus to challenge the validity
of Section 13AA. It was contended that the moneys that were
deducted were moneys that belonged to the contractor and it
was only the contractor who could successfully lay such a
challenge. The contention ignores the tact that the
appellant owner is aggrieved and damnified by the penalty
that lias been imposed upon it under sub-section (5) for
contravention of sub-section (1) of Section 13AA. It has.
therefore, the standing to contest the validity of Section
13AA.
It was then contended by learned counsel for the State
that the Preamble of the Orissa Sales Tax Act took account
of the fact that that statute was limited to the sale or
purchase of goods in Orissa. Unfortunately, it would appear
that the State legislature overlooked its limitations, even
as contained in the Preamble, when enacting Section 13AA.
It was also contended that tile deduction that was required
to be made under Section 13AA(1 ) was of four per cent of
the amount credited or paid by the owner to the contractor,
whereas the sales tax liability of the contractor thereon
was
outside sales or sales in the course of import. There
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is, in our view, therefore, no doubt that the provisions of
Section 13AA are beyond the powers of the State legislature
for the State legislature may make no law levying sales tax
on inter-State sales, outside sales or sales in the course
of import.
It was contended on behalf of the State that the
appellant, as owner, had no locus to challenge the validity
of Section 13AA. It was contended that the moneys that were
deducted were moneys that belonged to the contractor and it
was only the contractor who could successfully lay such a
challenge. The contention ignores the fact that the
appellant owner is aggrieved and damni^ed by the penalty
that lias been imposed upon it under sub-section (5) for
contravention of sub-section (1) of Section 13AA. It has,
therefore, the standing to contest the validity of Section
13AA.
It was then contended by learned counsel for the State
that the Preamble of the Opssa Sales Tax Act took account of
the fact that that statute was limited to the sale or
purchase of goods in Orissa. Unfortunately, it would appear
that the State legislature overlooked its limitations, even
as contained in the Preamble, when enacting Section 13AA.
It was also contended that the deduction that was required
to be made under Section 13AA(1 ) was of four per cent of
the amount credited or paid by the owner to the contractor,
whereas the sales tax liability of the contractor thereon
was
eight per cent. It was contended that this
requirement proceeded on the assumption that half of the
amount was not liable to tax being in respect of inter-State
sales, outside sales and export sales. No such assumption
based on the rate of tax at any given point of time can be
made. Section 13AA should have been precisely drafted to
make it clear that no tax was levied on that part of the
amount credited or paid that related to inter-State sales.
outside sales and sales in the course of import,
particularly after the previous Section 13AA had been struck
down by the Orissa High Court for the reason that it was
couched in terms wider than were permissible to the State
legislature and that judgment was accepted- in the result,
the appeal is allowed and the judgment and order under
appeal is set asid^. Section 13AA of the Orissa Sales Tax
Act, as amended with effect from 4^ October, 1993, is struck
down as being beyond the purview of the Orissa State
Legislature. Such amount as has been collected from the
appellant under the provisions of Section 13AA shall
forthwith be refunded by the State.
There shall be no order as to costs.
Civil Appeal Nos. 1748-1749 & 2606 of 1998 :
Following the judgment just delivered in C.A. No.
1750 of 1998, the appeals are allowed and the orders under
appeal are .set aside-
Such amount as has been collected from the appellant
under the provisions of Section 13AA shall forthwith be
refunded by the State.
No order as to costs.
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