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Madhya Pradesh High Court · body

2006 DIGILAW 1154 (MP)

M/s. Jaiprakash Associates Ltd v. State of M. P.

2006-09-28

A.K.PATNAIK, DEEPAK VERMA, DIPAK MISRA

body2006
Judgment A.K.Patnaik, CJ. ( 1. ) Section 35 of the Madhya Pradesh Commercial Tax Act, 1994 (for short the Act), provides for deduction at source of tax payable by a contractor. The said Section 35 of the Act was challenged before this Court in Punj Lloyd Ltd. Vs. State of M.P. and others (102 STC 299) and a Division Bench of this Court held that the State Legislature was competent to make a law imposing taxes on sale or purchase of goods, under Entry 54 of List II of the 7th Schedule to the Constitution of India and Section. 35 of the Act which provides for deduction at source of tax payable by a contractor is only a machinery provision and not a substantive provision for the impost and the charging section was Section 9 of the Act under which the incidence of taxation is on sale and purchase of goods and the State Legislature has not exceeded its powers in enacting Section 35 of the Act. After the said judgment in Punj Lloyd Ltd. Vs. State of M.P. and others (supra), the Supreme Court delivered the judgments in Steel Authority of India Ltd. Vs. State of Orissa and others [118 STC 297 (SC)] and in Nathpa Jhakri Jt. Venture Vs. State of Himachal Pradesh [118 STC 306 (SC)] striking down the provisions of the Orissa Sales Tax Act and the Himachai Pradesh General Sales Tax Act providing for the deduction of sales tax at source from the bills of the contractors. Thereafter, the present writ petition was filed before this Court challenging the constitutional validity of Sections 35 and 35-A of the Act and Rule 42-A of the M.P. Commercial Tax Rules, 1995 (for short the Rules) and by order dated 3-3-2005, a Division Bench of this Court has referred the question of correctness of decision of the Division Bench in Punj Lloyd Ltd. Vs. State of M.P. (supra), after the decisions of the Supreme Court in Steel Authority of India Vs. State of Orissa and Nathpa Jhakri Jt. Venture Vs. State of Himachai Pradesh (supra). ( 2. ) Mr. Kavin Gulati, learned Counsel appearing for the petitioner, submitted that in Gannon Dunkerley and Co. Vs. State of M.P. (supra), after the decisions of the Supreme Court in Steel Authority of India Vs. State of Orissa and Nathpa Jhakri Jt. Venture Vs. State of Himachai Pradesh (supra). ( 2. ) Mr. Kavin Gulati, learned Counsel appearing for the petitioner, submitted that in Gannon Dunkerley and Co. Vs. State of Rajasthan [88 STC 204 (SC)], the Supreme Court held that it is necessary to exclude from the value of works contract, the value of goods which are not taxable by the State in view of Sections 3, 4 and 5 of the Central Sales Tax Act, 1956 (for short the CST Act) as no sales tax is payable on value of such goods under the Sales Tax Act of a particular State and in accordance with the said decision of the Supreme Court in the case of Gannon Dunkerley and Co. Vs. State of Rajasthan (supra), the State Legislature of the M.P. has, in fact, provided in Section 79 of the Act that notwithstanding anything contained in the Act a tax on sale or purchase of goods shall not be imposed under the Act (i) where such sale or purchase takes place outside the State of Madhya Pradesh; or (ii) where such sale or purchase takes place in the course of inter-State trade or commerce; or (iii) where such sale or purchase takes place in the course of import of the goods into, or export of the goods out of the territories of India. He submitted that therefore no sales tax can be levied on the sale in the course of inter-State trade or commerce on sale of goods outside the State of M.P. and on sale in the course of import or export of goods. He submitted that Section 35 of the Act provides that deduction at the rate of 2% of the value of the contract towards tax payable by the contractor shall be made in case where the works contract exceeds the value of Rs. He submitted that Section 35 of the Act provides that deduction at the rate of 2% of the value of the contract towards tax payable by the contractor shall be made in case where the works contract exceeds the value of Rs. 1 Lakh and the value of contract may include not only sales of goods in the works contract within the State of M.P. but also sale outside Madhya Pradesh, sales made in the course of inter-State trade and commerce and sales in the course of export and import of goods on which the State Legislature has no power under Entry 54 of List II of 7th Schedule of the Constitution to make law. He submitted that the Supreme Court in the case of Steel Authority of India Ltd. Vs. State of Orissa (supra), struck down the provisions of Section 13-AA of the Orissa Sales Tax Act as introduced by the State Legislature of Orissa w.e.f. 4-10-1993 similar to Section 35 of the Act, which did not provide for exclusion of sales outside the State, sales in course of inter-State trade and commerce and export sales. He further submitted that in Nathpa Jhakri Jt. Venture Vs. State of Himachal Pradesh (supra), the Supreme Court relying on the decision in the case of Steel Authority of India Ltd. (supra), also struck down the provisions of Section 12-A of the Himachal Pradesh General Sales Tax Act after holding that the said provision authorized the collection of sales tax on inter-State sales, outside sales and export and import sales, which are outside the purview of the State Act. ( 3. ) Mr. ( 3. ) Mr. Sanjay Yadav, learned Deputy Advocate General appearing for the respondents, submitted that Section 35 of the Act has to be read with Section 35-A and Section 35-A of the Act states that notwithstanding anything contained in Sections 34 and 35, no deduction or deduction at a lower rate or deduction of a lump sum amount at source towards the tax payable shall be made under any of the said sections in the case of dealer or person, if such dealer or person furnishes to the person responsible for paying any amount in respect of the sale, supply or contract referred to in Sections 34 and 35, as the case may be, a certificate in writing in the prescribed form issued in the prescribed manner by such authority as may be prescribed. He submitted that under Section 35-A of the Act, a certificate can be issued to a dealer by the Prescribed Authority so as to enable the dealer to get deduction of the value of goods sold outside Madhya Pradesh, in the course of inter-State trade and commerce or in the course of export and import of goods from the value of the contract and in such a case, deduction of tax under Section 35 of the Act would be on the value of contract less the value of goods which are sold outside the Madhya Pradesh, in the course of inter-State trade and commerce and in the course of export and import. He cited the decision of the Supreme Court in A.V. Fernandez Vs. State of Kerala ( AIR 1957 SC 657 ), wherein the Supreme Court has explained the manner in which a non-obstante provision in a statute has to be interpreted. ( 4. ) Sections 35(1) and 35-A of the Act are extracted herein below :-"Section 35. Deduction at source of tax payable by a contractor.- (1) Notwithstanding anything contained in any other provision of this Act, any person letting out a works contract of value exceeding one lac rupees to a contractor involving sale of any goods in the course of execution thereof by the contractor shall before making the payment of any amount towards the value of such contract to him, deduct at the rate of two per cent an amount towards the tax payable by the contractor under this Act. The amount so deducted shall be adjusted towards the tax assessed on such contractor under Section 27 and any amount that remains after such adjustment shall be refundable to the contractor. *** *** *** *** *** Section 35-A. Saving for person responsible for deduction at source.- Notwithstanding anything contained in Sections 34 and 35, no deduction or deduction at a lower rate or deduction of a lump sum amount at source towards the tax payable shall be made under any of the said sections in the case of dealer or person, if such dealer or person furnishes to the person responsible for paying any amount in respect of the sale, supply or contract referred to in Sections 34 and 35, as the case may be, a certificate in writing in the prescribed form issued in the prescribed manner by such authority as may be prescribed." ( 5. ) A plain reading of Section 35(1) of the Act quoted above, will show that in a case of a works contract of the value exceeding one lac rupees which involves sale of any goods in the course of execution thereof by the contractor, a deduction at the rate of 2% on the value of such works contract is to be made. There is no provision in Section 35 (1) of the Act quoted above for exclusion of sales outside the State of Madhya Pradesh, sales in the course of inter-State trade and commerce, sales in the course of export and import of goods covered. The opening words in Section 35 (1) of the Act further states that "notwithstanding anything contained in any other provision of this Act", the deduction has to be made at the rate of 2% of the value of works contract. Thus, even though a provision is made under Section 79 of the Act that a tax on sale or purchase of goods shall not be imposed on sales which take place outside the State of Madhya Pradesh, in the course of inter-State trade and commerce or in the course of export and import of goods, there is no scope at all to exclude the categories of sale mentioned in Section 79 of the Act from the value of the works contract for the purpose of deduction of sales tax at source at the rate of 2% of the value of the contract under Section 35 of the Act. ( 6. ) It is true as has been submitted by Mr. Sanjay Yadav that Section 35 (1) has to be read along with Section 34, but a reading of Section 35-A of the Act as quoted above would show that the said Section 35-A does not provide for excluding from the value of works contract sales made outside the State of Madhya Pradesh, sales made in the course of inter-State trade and commerce and sales made in the course of export and import goods. There are also no guidelines whatsoever in Section 35-A of the Act that while issuing a certificate in writing in the prescribed form in the prescribed manner by the Prescribed Authority, sales made outside the State of Madhya Pradesh, sales made in the course of inter-State trade and commerce and sales made in the course of export and import of goods will be excluded from the value of contract for the purpose of 2% deduction at source. Thus, even if Section 35 is read along with Section 35-A of the Act as suggested by Mr. Sanjay Yadav, Section 35 of the Act, which does not provide for exclusion of the aforesaid categories of sales on which no sales tax can be levied by the State Legislature under Entry 54 of List II of the 7th Schedule of the Constitution of India, cannot be saved. ( 7. ) In the case of Steel Authority of India Vs. State of Orissa (supra), the Supreme Court referred to its earlier observations Bhawani Cotton Mills Ltd. Vs. State of Punjab [1967 (20) STC 290 (SC)], in which it was held that "if a person is not liable for payment of tax at all, at any time, the collection of a tax from him, with a possible contingency of refund at a later stage, will not make the original levy valid". Relying on the aforesaid observations in Bhawani Cotton Mills Ltd. Vs. State of Punjab (supra), the Supreme Court held in the case of Steel Authority of India Vs. State of Orissa (supra):- "13. There can be no doubt, upon a plain interpretation of Section 14-AA, that it is enacted for the purposes of deduction at source of the State sale tax that is payable by a contractor on the value of a works contract. State of Orissa (supra):- "13. There can be no doubt, upon a plain interpretation of Section 14-AA, that it is enacted for the purposes of deduction at source of the State sale 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 13-AA (5) is entitled to take into account the fact that the works contract involves transfer of property in goods consequent upon of an inter-State sale, an outside sale or a sale in the course of import. The owner is required by Section 13-AA (1) to deposit towards the contractors 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 value 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 13-AA are beyond the powers of the State Legislature for the State Legislature may make no law levying sales taxbn inter-State sales, outside sales or sales in the course of import." ( 8. ) Similarly, in Nathpa Jhakri Jt. Venture Vs. State of Himachal Pradesh (supra), the Supreme Court relying on the aforesaid two earlier decisions in Bhawani Cotton Mills Ltd. Vs. State of Punjab (supra), and in Steel Authority of India Vs. State of Orissa (supra), held in Para 4 :- " Abare perusal of the two provisions will make it clear that in either provision there is an obligation to deduct from transactions relating to works contract on bills or invoices raised by the works contractor an amount not exceeding 4 per cent or 2 per cent, as the case may be. Though the object of the provision is to meet the tax in respect of the transactions on all works contract on the valuable consideration payable for the transfer of property in goods involved in the execution of the works contract, the effect of the provision is that, irrespective of whether the sales are inter-State sales or outside sales or export sales which are outside the purview of the State Act and those transactions in respect of which no tax can be levied even in terms of the enactment itself, such deductions have to be made in the bills or invoices of the contractors. To say that if a person is not liable for payment of tax inasmuch as on completion of the assessment refund can be obtained at a later stage is no solace, as noticed in Bhawani Cotton Mills Ltd. Vs. State of Punjab, (1967) 20 STC 290 (SC) : (1967) 3 SCR 577 . Further, there is no provision for certification of the extent of the deduction that can be made by the authority. Therefore, we must hold that arbitrary and un- canalized powers have been conferred on the concerned person to deduct up to 4 per cent from the sum payable to the works contractor irrespective whether ultimately the transaction is liable for payment to any sales tax at all. In that view of the matter, we have no hesitation in rejecting the contention advanced on behalf of the State." ( 9. ) Again in M/s. Rapti Commission Agency Vs. State of U.P. and others [JT 2006 (7) SC 267], the Supreme Court reiterated its view in Bhawani Cotton Mills Ltd. Vs. State of Punjab (supra), Steel Authority of India Vs. State of Orissa (supra), and in Nathpa Jhakri Jt. Venture Vs. ) Again in M/s. Rapti Commission Agency Vs. State of U.P. and others [JT 2006 (7) SC 267], the Supreme Court reiterated its view in Bhawani Cotton Mills Ltd. Vs. State of Punjab (supra), Steel Authority of India Vs. State of Orissa (supra), and in Nathpa Jhakri Jt. Venture Vs. State of Himachal Pradesh (supra), and observed in Para 12 : "Before we part with the case, it would be appropriate to remind the legislatures of what was stated in Bhawani Cotton Mills case (supra), that if a person is not liable for payment of tax at all, at any time, the collection of a tax from him, with a possible contingency of refund at a later stage, will not make the original levy valid, because if sales or purchases are exempt from taxation altogether, they can never be taken into account, at any stage, for the purpose 6f calculating or arriving at the taxable turn-over and for levying tax. The view was reiterated in Steel Authoritys case (supra) and Nathpa Jhakris case (supra). In the latter case, it was noted, echoing the view in Bhawani Cotton Mills case (supra), that it is no solace to say that such a person can get refund after completion of assessment. If the principles indicated in these cases are followed, large number of unnecessary litigations can be avoided." ( 10. ) Hence the view taken by the Division Bench of this Court in Punj Lloyd Ltd. Vs. State of M.P. (supra), is no longer correct after the aforesaid decisions of the Supreme Court. We declare that Section 35 of the Act is beyond the competence of the State Legislature and is ultravires the Constitution. Since we have declared Section 35 of the Act as ultravires the Constitution, it is not necessary for us to consider the other contention raised by the petitioner that Section 35 of the Act does not exclude labour and other components from the value of works contract for the purpose of deduction at source at the rate of 2%. The matter may now be placed before the Division Bench.RAJENDRA