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2004 DIGILAW 658 (JHR)

Larsen And Toubro Limited v. State Of Jharkhand

2004-06-30

P.K.BALASUBRAMANYAN, R.K.MERATHIA

body2004
JUDGMENT P.K. Balasubramanyan, C.J. 1. Section 25-A of the Bihar Finance Act, 1981 has been the subject matter of controversy. The section provides for advance recovery of tax payable under that Act. Notwithstanding anything contained in Section 26 of that Act, Section 25-A provides that every person responsible for making any payment of sale price or any amount purporting to be the full or part payment of sale price or any payment in discharge of any liability on account of valuable consideration payable in respect of transfer of property in goods, whether as goods or in some other form, involved in the execution of a works contract has to deduct an amount, at a rate specified by the State Government, in a notification published in the official Gazette purporting to be a part or full amount of tax payable on the sale of such goods from every bill or invoice raised by a works contractor engaged by him. The petitioner in this writ petition, M/s. Larsen & Tubro challenged the said provision, as it then stood, in the High Court of Patna in CWJC No. 878 of 1997. The argument on behalf of the petitioner was that the State was incompetent to impose any tax on a works contract and the State also did not have the power to impose tax on the sale of goods, if the sale is not an intra-State sale. The Patna High Court in the decision reported in 117 STC 41, upheld the challenge of the petitioner. Of course, the extent to which the challenge was upheld is one of the matters in controversy. For the moment it needs only to be noticed that the challenge was upheld to the extent of the Division Bench holding that Section 25-A of the Bihar Finance Act, to the extent it related to transfer of properties in goods taking place in the course of inter-State trade or commerce or a sale outside the State, or in the course of import within the ambit of Sections 3, 4 and 5 of the Central Sales Tax Act or in "decided goods" within the meaning of Sections 14 and 15 of the Central Sales Tax Act must be held to be ultra vires Entry 54 of the State List read with Entry 92-A of the Union List and Article 286 of the Constitution of India. It was also held that to the extent the section provided for deduction from payment made on account of labour charges and other services towards sales tax, the provision must be included to be ultra vires Entry 54 of the State List read with Article 366(29-A)(b) of the Constitution of India. This decision was challenged in the Supreme Court by the State of Bihar without success. 2. The decision of the Patna High Court was rendered on 19.7.1999. On 15.11.2000, the Bihar-Reorganisation Act, 2000 came into force and the State of Bihar was divided into re-constituted State of Bihar and the State of Jharkhand. Under Section 85 of the Reorganisation Act, the State of Jharkhand had power to adapt the Bihar Finance Act and the Rules made thereunder. The Bihar Finance Act and all statutory terms, circulars, and notifications which were in force on 15.11.2000, were adapted by the State of Jharkhand. We may incidentally noticed that the Bihar Legislature after the Reorganisation enacted a Validation Act and re- introduced Section 25-A by trying to remove the defects which former the foundation of the judgment reported in 117 STC 41. We are not concerned with that aspect at the moment. 3. What the State of Jharkhand did was to merely introduce the third proviso to Section 25-A of the Finance Act by amending the Jharkhand Finance Act, 2001. We are not concerned with that aspect at the moment. 3. What the State of Jharkhand did was to merely introduce the third proviso to Section 25-A of the Finance Act by amending the Jharkhand Finance Act, 2001. We may now read the section in so far as it relates to Section 25-A(1) of the Act, after the addition of the third proviso : "25-A. Advance recovery of tax--(1) Notwithstanding anything contained in Section 26, every person responsible for making any payment of sale price or any amount purporting to be the full or part payment of the sale price or any payment in discharge of any liability on account of valuable consideration payable in respect of transfer of property in goods, whether as goods or in some other form, involved in the execution of a works contract, shall be lawfully competent to deduct an amount at the rate or rates specified by the State Government, in a notification published in the official Gazette, purporting to be a part or full amount of tax payable on the sale of such goods from every bill or invoice raised by the works contractor as payable by the person : Provided that no such payment or discharge of any such bill or invoice raised by a works contractor shall be made without deduction referred to in Sub- section (1) : Provided further that the rate or rates to be specified by the State Government under Sub-section (1) shall not exceed four per centum : Provided that under the following circumstances there shall be no deduction of tax at source provided the Joint Commissioner of Commercial Taxes (Administration) issues a certificate to be produced before the concerned authority to the following effect -- (i) Sales under Sections 3, 4 and 5 of the Central Sales Tax Act, 1956, (ii) Sales/supplies under Sections 14 and 15 of the Central Sales Tax Act, 1956, (iii) On the amount to be paid by the Contractor to sub-con tractor provided the sub-contractor is a registered dealer and it is established that the sub-contractor has included the payment receipt from the contractor in his returns, (iv) Labour and services, designs, programmes, establishments, consumable articles, water, electricity etc. and also on the machines and equipments hired on rent. All those goods will pass on in the same form and/or are supplied in the same form. and also on the machines and equipments hired on rent. All those goods will pass on in the same form and/or are supplied in the same form. Explanation.--"Person" in this section includes all officers and authorities of the Central or State Government or of a company, corporation, board, authority, cooperative society, undertaking or any other body constituted or formed under any Act and of any firm or association of persons and organisation." 4. Thus, an attempt was made by introducing a proviso to take out of the purview of the Act, sales outside the taxing power of the State either as covered by the Central Sales Tax Act, or as forming part of a works contract. 5. The petitioner has filed the present writ petition as amended, in effect, seeking a declaration that the Section remain unenforceable notwithstanding the insertion of the third proviso, in view of the fact that on the day it was adapted by the State of Jharkhand, Section 25-A stood struck down in its entirety by the decision in 117 STC 41 and consequently, there was no section in existence to which the proviso in question could be added. Alternatively, it was contended that all the vices pointed out by the Patna High Court in the earlier decision making Section 25-A of the Act unreasonable, arbitrary and unconstitutional, remain and consequently, the section was liable to be struck down by this Court even if it were to be held that the section was available to be adapted in the State of Jharkhand, in spite of the decision in 117 STC 41. On behalf of the State of Jharkhand, it is contended that Section 25-A of the Bihar Finance Act was not struck down in its entirety by the Patna High Court and the State of Jharkhand was free to adapt that section after removing the anomalies pointed out by the Patna High Court and the anomalies indicated stand removed by the introduction of the proviso to Section 25-A(1) of the Act. It is submitted that neither the legislative competence nor the power to tax could be successfully challenged by the petitioner. 6. We shall first consider the question whether Patna High Court could be taken to have struck down Section 25-A of the Bihar Finance Act in its entirety or taken to have declared the section invalid as a whole. It is submitted that neither the legislative competence nor the power to tax could be successfully challenged by the petitioner. 6. We shall first consider the question whether Patna High Court could be taken to have struck down Section 25-A of the Bihar Finance Act in its entirety or taken to have declared the section invalid as a whole. We may straightaway notice that during the course of their reasoning, their Lordships of the Patna High Court had indicated some of the vices in Section 25-A of the Act including its arbitrariness and unreasonableness. But ultimately, what we find is that the Court rested its decision on the question of Legislative competence of the State Legislature under Entry 54 of List II of the Seventh Schedule of the Constitution and as impinging upon Entry 92-A of List I. At the risk of repetition, we may quote the operative portion of the judgment here : "45. To conclude, the provisions of Section 25-A of the Bihar Finance Act to the extent they relate to transfer of property in goods taking place in course of inter-State trade or commerce or a sale outside the State or in the course of import within the ambit of Sections 3, 4 and 5 of the Central Sales Tax Act, or the "declared goods", within the meaning of Sections 14 and 15 of the said Act, must be held to be ultra vires Entry 54 of the State List read with Entry 92-A of the Union List and Article 286 of the Constitution. Further, to the extent they provide for deduction from payment made on account of labour charges and other services towards sales tax, the provisions must be held to be ultra vires Entry 54 read with Article 366(29-A)(b) of the Constitution." 7. From this, it is possible to say that the Patna High Court had only read down the section or declared it ultra vires only in so fair as it sought to tax Inter-State sales or sale of declared goods within the meaning of Sections 14 and 15 of the Central Sales Tax Act and the imposition of tax on amounts covered by labour charges and other services, in a works contract. But what is argued by learned counsel for the petitioner is that the Division Bench had found substantial infirmities in the provision as can be seen from the judgment and it found the provision to be arbitrary and unreasonable and understood in the light of the reasons given by the Division Bench, it must be taken that the section was struck down as a whole. We do see some force in this submission, especially when we advert to paragraphs 23, 32, 39, 40 arid 43 of the said judgment. In paragraph 39, the learned Judges have referred to the practical difficulties that may arise in giving effect to Section 25-A of the Act by pointing out the absence of any mechanism or guidelines in that section to enable a person to determine the amount. The Court also noticed that the question whether a sale was one within the realm of inter-State trade or commerce or an outside sale or a sale in the course of import or export within the meaning of the Central Sales Tax Act, was a ticklish question which even the Courts had difficulty in deciding and it will be very difficult to decide such a question at a stage when even the assessment proceedings have not commenced. In Paragraph 40, their Lordships specifically held that in order to sustain such a provision, some mechanism had to be provided in the statute for excluding transactions, which fell outside the competence of the State Legislature on the basis of prima facie adjudication, subject to a final determination of the right at the stage of assessment. In paragraph 43, the Division Bench was inclined to hold that it would be a case of double taxation, though for a short interregnum, and no machinery had been provided in the Act to take into account the possible loss that may be incurred by the contractor by the said double taxation. These vices, according to the learned counsel for the respondents, have been rectified by the introduction of the third proviso, which also excludes from within its purview, those transactions which the State Legislature had no competence to tax. 8. We are now considering only the question whether we can hold, on the basis of the judgment above referred to, that the section stands struck down as a whole. 8. We are now considering only the question whether we can hold, on the basis of the judgment above referred to, that the section stands struck down as a whole. Though the reasoning may suggest that the Court was inclined to think that the provision was arbitrary, ultimately, the Court did not strike down the provision as a whole, as being arbitrary or unreasonable or as violative of any of the fundamental rights of the petitioner. The Court satisfied itself by reading down the provision by declaring that the said provision cannot apply to transactions which fell outside the competence of the State Legislature to tax. As was stated, we are now only considering the question whether the section was available in the Act to be adapted in the State of Jharkhand. after the pronouncement of the Patna High Court in 117 STC 41. 9. Reading down a provision so as to ensure that it falls within the competence of the concerned Legislature or Parliament is generally resorted to while dealing with a challenge based on Legislative competence. We are inclined to think, on a close reading of the decision in 117 STC 41, that this device was adopted by the Patna High Court while dealing with Section 25-A of the Act. In other words, we understand the decision as only reading it down and excluding from its purview the transactions that fell under the Central Sales Tax Act and transactions which are outside the competence of the State Legislature to tax in a works contract as explained in the Gannon Dunkerley, case. 10. To the independent challenge made by the writ petitioner to Section 25-A of the Act, read with the third proviso introduced on 2.1.2002, a preliminary objection was raised by learned counsel for the respondents to the effect that the challenge to the validity of the section as sought to be raised, was barred by res judicata by virtue of the decision in 117 STC 41. The argument was that the validity of the very section was earlier challenged by the petitioner itself and the said challenge was not fully upheld by the Division Bench of the Patna High Court, which in the above said decision, only declared that the section would not hit transactions coming under the Central Sales Tax Act and the labour and other components involved in a works contract. It was, therefore, not permissible for the petitioner to reiterate now the contentions not accepted by the Division Bench earlier. The contentions in that behalf were barred by res judicata. This was answered by learned counsel for the petitioner by pointing out that, as a matter of fact, the Division Bench in 117 STC 41 had found the section infirm even apart from finding it invalid regarding transactions coming under the Central Sales Tax Act and the components that are parts of a works contract and it was not as if the contention on behalf of the petitioner was rejected. Counsel tried to argue that as a matter of fact, the section had been struck down in its entirety, an argument that we have repelled in the earlier part of this judgment. More, importantly, learned counsel for the petitioner contended that it was only by the introduction of a third proviso to Section 25-A(1) of the Act that the provision was sought to be made workable in the context of the decision in 117 STC 41 and therefore, the occasion has now only arisen to consider whether the section with the addition of the third proviso thereto can pass the test of constitutional validity and Legislative competence. The Court while rendering decision in 117 STC 41, had no occasion to consider the scope of the third proviso introduced in the State of Jharkhand on 2.1.2002 and certainly, the challenge to that proviso could not be held to be barred by res judicata by the prior decision. Only a matter which is heard and finally decided can operate as a res judicata in a subsequent proceeding. 11. We are inclined to agree with the learned counsel for the petitioner that in any event, the challenge to the third proviso to Section 25-A(1) of the Act is not barred by res judicata, either actual or constructive. The section, as it existed, was found to be suffering from many defects by the Division Bench in 117 STC 41. But ultimately, the Division Bench, inspite of those defects, only declared that the section could not operate on the sale transactions under Sections 4, 5, 14 and 15 of the Central Sales Tax Act and labour and other components involved in a works contract. But ultimately, the Division Bench, inspite of those defects, only declared that the section could not operate on the sale transactions under Sections 4, 5, 14 and 15 of the Central Sales Tax Act and labour and other components involved in a works contract. By introducing the third proviso, what the State Legislature had attempted to do, is to meet those objections indicated in 117 STC 41, or in other words, to remove the foundation of the decision in 117 STC 41 so as to make this section legislatively competent and enforceable. The occasion to test its validity in the context of the third proviso newly introduced has arisen for the first time only now. Therefore, we are of the view that the challenge of the petitioner to Section 25-A(1) of the Act with a particular reference to the third proviso thereto, cannot be shut out on the ground that the said challenge is barred by res judicata. We, therefore, overrule the contention raised in that behalf, by learned counsel for the respondents. 12. We may also notice that there is a challenge to the notification dated 19.6.1993 issued in the year 1993, which has been adapted or which is to be deemed to be valid, by virtue of Section 85 of the Bihar Reorganisation Act, 2000 and that challenge has to be tested in the context of the third proviso to Section 25(A)(1) of the Act as a whole. That question arose for consideration only on the introduction of the third proviso by way of an amendment and that challenge also, therefore, cannot be said to be barred by res judicata by virtue of the decision in 117 STC 41. We, therefore, proceed to consider on merits, the contentions in that behalf. 13. That question arose for consideration only on the introduction of the third proviso by way of an amendment and that challenge also, therefore, cannot be said to be barred by res judicata by virtue of the decision in 117 STC 41. We, therefore, proceed to consider on merits, the contentions in that behalf. 13. It is contended on behalf of the petitioner that even though the third proviso to Section 25(A)(1) of the Act purports to exclude from the purview of Section 25-A, the transaction coming under the Central Sales Tax Act, 1956 and the amount paid by a contractor to a sub-contractor and labour and services, designs programmes; establishments, consumable articles, water, electricity, and also on machinery and equipments acquired on rent involved in a works contract, there is no machinery provided to assess these components at the pre-assessment stage or at the stage of issuing a certificate to an assessee in terms of Section 25-A of the Act, for deduction of an amount in terms of that provision. It can be seen that the notification dated 19.6.1993 was issued at a time when the third proviso had not been introduced and the decision in 117 STC 41 had not been rendered. Even though, it was after the decision in Gannon Dunkerley case 88 STC 204 rendered on 17.11.1992, the said notification actually directs the deduction of a particular percentage from the total amount involved in a contract and not only on the percentage of the amount of the taxable components. Why a revised notification conforming to the third proviso to Section 25-A(1) was not issued by the Government, was not clarified by learned counsel for the respondents. The position, therefore, is that the notification now purports to direct the principal contractor to deduct tax at 2 per cent on the gross value of the bills or the invoices raised by the contractor. Though tentative, this would mean that the deduction ought to be made also on the components covered by sales coming under the Central Sales Tax Act, and also on excluded components involved in a works contract. Obviously, the notification could not prevail over the section itself and based on the notification, it would be impossible to collect tax at 2% on the gross value of the contract. 14. Obviously, the notification could not prevail over the section itself and based on the notification, it would be impossible to collect tax at 2% on the gross value of the contract. 14. Learned counsel for the respondent in this context submitted that the notification must be understood in the light of the third proviso to Section 25-A(1) of the Act and deductions need to be made only on the amounts indicated in the certificate by the Joint Commissioner, who is authorized to issue such certificates under Section 25-A(1) of the Act. At this stage, we must point out that though the Joint Commissioner is to issue a certificate indicating the excludable part of the turn-over as sales coming under Sections 3, 4 and 5 of the Central Sales Tax Act, as sales coming under Sections 14 and 15 of the Central Sales Tax Act, the amounts paid by a contractor to a sub- contractor who is a registered dealer and labour, service and other charges referred to therein, there is no machinery provided for ascertaining these amounts even on a rough basis by the Joint Commissioner. We must remember that the certificate is required to be issued even before payment under the contract has commenced. It is not provided that a fresh certificate has to be issued each time, as part to the bill is accepted by the principal contractor and the amount therein is disbursed to the works contractor. If it is understood as one-time certificate to be issued by the Joint Commissioner, then, obviously, it is to be issued immediately after the contract has been entered into and the whole calculation will depend upon a more understanding of the terms of the contract. It appears to to us that it will be really difficult for a Joint Commissioner to guesstimate taxable components in a works contract in the context of the third proviso to Section 25- A(1) of the Act. There also still remains the vices indicated by the Division Bench in the decision in 117 STC 41 of the effect of a double taxation and the unreasonable retention of the amounts of the contractor announced by the State by a tardy provision for revision and the absence of a provision for interest for the entire period of retention and the absence of a machinery to make an assessment while issuing a certificate. This implies that the adaptation of the notification dated 19.6.1993 issued earlier, has clearly made the position totally confusing. 15. Of course, one way of getting out of it would be to say that the Joint Commissioner would simply accept any declaration that may be made by the principal contractor as regards the excludable components involved in a works contract. But as pointed out by learned counsel for the petitioner, even this may become impossible in the sense that the parties could not say with certainly that a particular sale of goods involved in a works contract would only be a local sale within the competence of the State Legislature to tax and would not be an outside sale or inter-State sale. Most of the works contracts are long- term contracts and procuring of the goods to be supplied by the contractors would depend upon their availability at the relevant time and the sources from which it could be purchased at competitive rates. Therefore, neither the principal contractor who is bound to make the deduction, nor the works contractor would really be in a position to declare which part of the transaction of sale would be amenable to taxation and which part of it would not be amenable to taxation under the Finance Act. Therefore, it will be placing an unrealistic obligation on a principal contractor to make a declaration of what part of the gross value of the contract would be amenable to taxation under the State Finance Act and what part of it will be outside the same There will also be the imposition of a possible penalty, if the declaration is found to be untrue at a subsequent stage. 16. Learned counsel for the petitioner pointed out that the petitioner as a Contractor was filing regular monthly or quarterly returns and paying taxes on the amount received by it under Works Contract, which, in its reckoning, becomes liable to tax under the State Finance Act. It was, therefore, not as if there was no adequate protection for the State in the matter of collecting tax due from Contractor. After all, Section 25-A(1) of the Act is intended to (sic) machinery to falcitate the collection of tax due to State and to (sic) the interests of the State in the matter of collection. It was, therefore, not as if there was no adequate protection for the State in the matter of collecting tax due from Contractor. After all, Section 25-A(1) of the Act is intended to (sic) machinery to falcitate the collection of tax due to State and to (sic) the interests of the State in the matter of collection. From that point of view, a provision for deduction at source, as it were, could not be said to be beyond the power of the State. But when the provision is so indefinite and might lead to considerable difficulties, the Court has necessarily to consider its validity in the context of those facts. Even in this case, though we passed an interim direction to the Joint Commissioner to issue a certificate in terms of the third proviso to Section 25-A of the Act by our order dated 20.6.2003, it was submitted at the time of hearing that no such certificate had been issued by the Joint Commissioner even at the time of the hearing of the writ petition. 17. We do not find much merit in the contention of learned counsel for the petitioner that the issuance of the certificate by the Joint Commissioner would preclude the assessing authority from applying his mind and completing the assessment, since he was only an officer subordinate to the Joint Commissioner. Issuance of a certificate under third proviso to Section 25-A(1) of the Act is entirely different from the process of assessment to be completed by the Assessing Officer, It is not as if the Assessing Officer cannot go behind the certificate or beyond the certificate issued by the Joint Commissioner and complete the assessment based on the actual transactions disclosed before him at the time of assessment. It is not reasonable to expect that an Assessing Authority will complete the assessment not based on the materials available before him at the time of assessment, but would be guided by a certificate issued on estimate by the Joint Commissioner. 18. It is, no doubt, true that the State is entitled to protect the collection of the revenue by providing a deduction, like the one contained under Section 25-A(1) of the Act. 18. It is, no doubt, true that the State is entitled to protect the collection of the revenue by providing a deduction, like the one contained under Section 25-A(1) of the Act. But, at the same time, the State has to ensure that the said provision for deduction is based on an intelligible criteria and is not based merely on specialization or by including within its purview, transactions which could not be taxed by the State. What has occurred here in view of Section 25-A(1) of the Act the third proviso thereto, the adaptation, either express or implied, or the notification dated 19.6.1993, and the issuance of the notification dated 2.1.2002 is to make the deduction arbitrary, which is anathema to the Constitution. We are, therefore, inclined to hold that Section 25-A(1) of the Act read with the notification dated 19.6.1993 is not workable and, consequently, arbitrary and unreasonable. The addition of the third proviso to Section 25-A(1) of the Act has failed to remove the defects in Section 25-A of the Bihar Finance Act. The vices noted by the Division Bench in 117 STC 41 still remain. The provision as amended, remains unworkable and arbitrary. Section 25-A(1) of the Jharkhand Finance Act, 2001 and the notification dated 19.6.1993 and -hence struck down as unconstitutional. 19. In the result, the writ petition is allowed and Section 25- A(1) of the Jharkhand Finance Act as amended by Section 6 of the notification dated 2.1.2002 to the extent it amends Section 25-A of the Jharkhand Finance Act is struck down as unconstitutional. The State and the Authorities are restrained from collecting tax under Section 25-A of the Act from the assessment year commencing on 1.4.2004, and amount hitherto collected will be adjusted at the time of completing the assessments and excess if any refunded without delay.