Prakash Krishna, J.@mdashBy means of the present petition, the petitioner has sought a writ order or direction in the nature of certiorari for quashing of the notification dated 4-3-2008 issued by the State Government (Annexure-8 to the writ petition), being unconstitutional and ultra vires to the U.P. Value Added Tax Act, 2008 (hereinafter referred to as the Act). Also quashing of the order dated 12-2-2009 has been prayed for. A writ of mandamus commanding the respondents namely Deputy Commissioner, Commercial Taxes, Sector-5, Kanpur and Indo Gulf Fertilizers (a Unit of Aditya Birla Nuvo Ltd.) not to ask for or make any deduction towards tax at source under the said Act in respect of the amount receivable by the petitioner against the work order No. MM/214-816661 dated 29-8-2008, has also been sought.
2. The petitioner, a private limited company, undertakes and executes engineering and fabrication works contracts. It claims that M/S Indo Gulf
3. Fertilizers Ltd. the respondent No. 4 herein, awarded to the petitioner a work order for replacement of Combuston Air Pre-Heater (APH) at its factory at Jagdishpur Industrial Area, Sultanpur (U.P.). The said contract is dated 29-8-2008. Total value of the above contract is Rs. 1,33,20,000/- and it was to be completed by 30-4-2009. An application, requesting for issue of direction u/s 34 of the Act to the contractee namely Indo Gulf Fertilizers Ltd. not to deduct the amount of tax towards payment in respect of Labour Contract was filed before the Assessing Authority. The said application has been rejected by the order dated 12-2-2009, impugned in the present petition, on the ground that in view of Section 34(13) of the Act, 4% of the total sum is liable to deducted. Further, no notification has been issued by the State Government in exercise of provisions of Section 34(1) of the Act and as such, it is not possible to issue any such direction as prayed for.
4. Sri S.D. Singh, learned Counsel for the petitioner submits that the aforesaid order has been passed by the Assessing Authority on misconstruction of facts and law. He invited attention of the Court towards Notification dated 4-3-2008 issued u/s 34(1) of the Act which provides deduction of tax at source at the rate of 4%. The challenge in the present writ petition is the validity and legality of the said notification. Therefore, the Assessing Authority is not correct in saying that no such notification has been issued.
5. A counter affidavit has been filed on behalf of the respondents wherein the contents of the writ petition have not been disputed. A reading of the counter affidavit shows only this much that the tax liability has been determined on the basis of the terms and conditions of the contract as well as the action carried out by the petitioner. The counter affidavit is some what sketchy as it does not deal with legal issues raised by the petitioner in the writ petition. Except the admission or denial of the contents of writ petition, the counter affidavit lacks any material plea in defence.
6. Sri S.D. Singh, learned Counsel for the petitioner invited attention of the Court towards the relevant clauses of the contract, clause-11 specifically, which provides that the contractor shall arrange all types of consumables like electrodes, grinding wheels, oxygen & DA cylinders required to carry out the job. Elaborating the arguments, he submits that the contract in question is in the nature of pure and simple work contract, no tax liability can be imposed on the petitioner. He submits that in view of the above, the impugned notification dated 4-3-2008 (Annexure-8 to the writ petition) is liable to be struck down being ultra vires to the powers of the State Legislature as it does not provide any exception to deduct the tax at source on work contract. A work contract is not exigible to tax under the said Act and as such, the tax at source cannot be deducted and if there is any such provision, it is without jurisdiction and ultra vires of the powers, submits the learned Counsel for the petitioner.
7. Sri U.K. Pandey, learned Standing Counsel for the department, on the other hand, supports the action of the respondents and submits that validity of Section 8-D of U.P. Trade Tax Act which was akin to Section 34 of the Act has already been upheld by a Division Bench of this Court in V.K. Singhal and Ors. v. State of U.P. and Ors. 1995 UPTC 337. Elaborating the arguments, he submits that no prejudice has been caused by the impugned order in as much as the petitioner would be entitled to get the amount refunded after finalisation of the assessment proceedings.
8. Considered the respective submissions of the learned Counsel for the parties and perused the record.
9. The Act has replaced Section 8-D of U.P. Trade Tax Act. Section 8-D of U.P. Trade Tax Act corresponds to Section 34 of the Act. The Legislative competence of Section 8-D of U.P. Trade Tax Act was subject matter of challenge and its validity has been upheld in V.K. Singh and Ors. v. State of U.P. and Ors. (supra).
10. In the present case, validity of Section 34 of the Act has not been questioned. On the other hand, the notification dated 4-3-2008 in respect of deduction of tax at source on works contract by the contractee issued u/s 34 of the Act is under challenge. For the sake of convenience, English translation of the said notification is reproduced below:
In exercise of the powers under Sub-section (1) of Section 34 of Uttar Pradesh Value Added Tax Act, 2008 (U.P. Act No. 5 of 2008), The Governor is pleased to notify that with effect from 4th March, 2008 and subject to other provisions of Section 24, every person responsible for making payment to a contractor for discharge of any liability on account of valuable consideration payable in pursuance of a works contract, shall, all the time of making payment to the contractor, either by credit or in cash or in any other manner, deduct an amount equal to four percentum of such gross payment:
Provided that this notification shall not be applicable to a works contract other than between a contractor and,
1-The Central Government or any State Government; or
2-Any Local Authority; or
3-Any Corporation or Undertaking established or constituted by or under a Central Act or State Act; or
4-Any Company; or
5-Any Co-operate Society or other Society, Club, Firm or other Association of Persons, whether incorporated or unincorporated; or
6-Any University or other Educational Institutions and Trading Centres; or
7-Any other person engaged in construction of a Building, Shop, Apartment, Houses etc. for sale or other Commercial purposes ( except house and building constructed for personal use).
11. The above notification has been issued in exercise of powers conferred u/s 34 of the Act, therefore, it should be read and understood in the light of the provisions of Sections 34(1) and 34(2) of the Act. The relevant portion of the Section for the present purposes is reproduced below:
34. Tax deduction at source (1) Without prejudice to any other mode of recovery, payment or collection of tax under this Act the State Government may, by notification in the Gazette, direct that, in a specified case and in the specified circumstances but subject to such conditions as may be specified, every specified person responsible for making payment to the selling dealer, for discharge of liability on account of valuable consideration payable on sale of goods in such cases as may be specified, shall, at the time of making such payment to the seller, either by credit or in cash or in any other manner, towards satisfaction of tax payable by the dealer on account of sale of any taxable goods, deduct an amount determined in the manner specified:
Provided that where in case of a works contract, the contractor has awarded a sub-contract and the notification provides for deduction of amount by the contractee from the payments made to contractor, the contractor responsible for making any payment or discharge of any liability to any sub-contractor, in pursuance of a contract with the sub-contractor, the amount of such payments shall be deducted from the amount on which deduction is to be made by the contractee to the contractor.
(2) Upon issue of a notification under Sub-section (1), where-
(a) a dealer, who makes sale of any taxable goods and in whose case notification referred to in Sub-section (1) applies, for any reason claims that he either is not liable to pay tax on such sale or is liable to pay as tax an amount lesser than amount of deduction computed in the manner provided; or
(b) the person responsible for making payments to the dealer selling the goods is unable to ascertain the turnover of any goods sold, the person responsible for making payment shall require the selling dealer to produce direction issued in this behalf by the assessing authority of the selling dealer and shall act according to such direction of the assessing authority.
(3) ---
(4) In the circumstances under Sub-section (2), the dealer selling goods may, for issue of direction to the purchase to deduct an amount lesser than the proposed amount of tax or not to deduct any amount as tax, apply to the assessing authority having jurisdiction over the principal place of his business or if he has no fixed place of business, to the assessing authority in whose jurisdiction he ordinarily resides.
(5) The assessing authority referred to in Sub-section (4), after examining the liability of payment of tax of the dealer in respect of sale of goods made and after giving reasonable opportunity of being heard to the dealer, shall by an order in writing direct the purchaser of the goods accordingly.
(6)---
(7)---
(8) ---
(9) ---
(10) ---
(11)---
(12) ---
(13) ---
(14) No deduction under this section shall be made on the turnover of sale where such sale takes place-
(i) in the course of inter-State trade or commerce; or
(ii) outside the State; or
(iii) in the course of the export out of, or import into, the territory of India.
12. The main contention of the learned Counsel for the petitioner is that under Sub-section (1) of Section 34 of the Act, a notification for deduction of tax at source can be issued "towards satisfaction of tax payable by the dealer on account of sale of any taxable goods". It was contended that in the present case, the petitioner has entered into a pure work/labour contract, not involving any transfer of property in goods involved in its execution. According to the petitioner, all goods used in the installation of the Air Pre-Heater (APH) at Sultanpur Plant of M/S Indo Gulf Fertilizers are purchased and owned by Indo Gulf Fertilizers and thereafter made available to the petitioner only for the purposes of carrying out the labour contract/ work order of installing the same in the factory premises of Indo Gulf Fertilizers. The petitioner is only required to purchase consumables, like electrodes, grinding wheels, oxygen and DA cylinders. The electrodes in particular are wholly consumed in the process of welding necessary for installing/re-assembly of Air Pre-Heater and associated works. No property in the electrodes is available in any form upon completion of welding process.
13. Reference was made to Rule 9 of the Rules framed under the Act which provides mechanism for determination of turnover of sale of goods involved in the execution of a works contract. The said Rule provides that subject to other provisions of the Rules, all amounts representing the value of goods consumed in execution of the works contract; in which property in goods is not transferred in the execution of the works contract, shall be deducted if included in the gross amount received or receivable in respect of the works contract. The learned Counsel submits that on a plain reading of the impugned notification, the tax has been sought to be deducted at source in respect of pure work/labour contract, therefore, the notification is beyond the scope of Section 34(1) of the Act. Only such deductions at source are permissible which are "towards satisfaction of tax payable by the dealer on account of sale of any taxable goods". In other words, in the case of a pure labour/work contract, a dealer is not liable to pay any tax and no deduction is permissible. There being no such exemption in the said notification, the notification is bad being beyond the scope and purview of Section 34(1) of the Act.
14. Reference was also made to the definition of words ''works contract'' as defined u/s 2(au) which says that work contract includes any agreement for carrying out, for cash, deferred payment or other valuable consideration, the building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.
15. Section 3 of the Act which is a charging section provides for incidence, levy and rate of tax. Its Sub-section (6) says that turnover of sale of goods involved in execution of work contract in which property in goods is transferred shall be determined in the prescribed manner. Reference has been made to Rule 9 of the Rules framed under the Act. Reliance was placed on the following three cases:
(1)
13. There can be no doubt, upon a plain interpretation of Section 13-AA, 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 u/s 13-AA(5) is entitled to take into account the fact that the works contract involves transfer of property in goods consequent upon 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 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 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 tax on inter-State sales, outside sales or sales in the course of import.
(2) In
4. A bare 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 contracts 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
16. Lastly, (3)
17. A meaningful reading of three judgments, referred to above, would show that in all those cases, the challenge to the legislative competence was on the ground that the State Legislature has no legislative competence to make any provision relating to deduction of tax at source with respect to inter-State sale, outside sale or import sale, which is not so here. In the instant case, it is not the case of the petitioner that the transaction in question falls in any of the above categories i.e. either it is inter-State sale, or outside sale or import sale. On the contrary, the work contract is being executed within the State of U.P.
18. While preparing the judgment, we could lay our hands to U.P. Value Added Tax (Amendment), Act 2009. By Section 17 of the amending Act, Sub-section (14) to Section 34 has been inserted in the original Act. Sub-section (14) of Section 34 has already been reproduced above. The said provision has been given retrospective effect with effect from 1-1-2008 vide Section 1 of the Amending Act. Sub-section (14) of Section 34 of the Act is complete reply to the arguments of the learned Counsel for the petitioner.
19. Sri S.D. Singh, learned Counsel for the petitioner when it was pointed out to him by the Court, fairly accepts the above position. But, he maintains that the ratio laid down in the above cases would apply in the case of a pure work/labour contract. In the present fact situation, we are concerned with intra sales only.
20. The next limb of the argument is that on the principle as delineated in the aforesaid cases, a work contract being not liable to be taxed under the Act, no deduction in tax can be made at source and as such, there being no provision granting any exemption in respect of a pure work/labour contract, the notification is beyond the purview of Section 34(1) of the Act, is required to be considered.
21. Before proceeding further, we may note that we are dealing with a provision relating to deduction at source, vires of which has not been challenged. Rule 9 of the Rules framed under the Act provides that while determining the turnover in respect of works contract, deduction specified therein subject to fulfillment of the conditions laid therein, may be made.
22. Clause (a) of Rule 9(1) says that all amounts representing the value of goods consumed in execution of a works contract; in which property in goods is not transferred in the execution of the works contract can be deducted if included in the gross amount received or receivable in respect of the works contract. However, the said Rule shall be applicable at the time of determination of turnover.
23. Noticeably, ample safeguard has been provided by the Legislature by enacting Sub-sections (2), (4), (5) and (14) of Section 34 of the Act, to protect the validity of the notification, if the same is challenged on the ground that no deduction at source can be made when a dealer is not liable to pay tax under the Act. It says that upon issue of a notification under Sub-section (1) of Section 34 of the Act if any person claims that he either is not liable to pay tax on such sale or is liable to pay as tax an amount lesser than amount of deduction sought to be computed at source or the person responsible for making payment to the dealer selling the goods is unable to ascertain the turnover of any goods sold, the person responsible for making the payment shall require the selling dealer to produce direction issued in this behalf by the assessing authority of the selling dealer and shall act according to such direction of the assessing authority. A mechanism by enacting Sub-section (2) to Section 34 of the Act has been provided for in such cases where a person claims that he either is not liable to pay tax on such sale tax etc. The State Legislature, while enacting Section 34 were presumably conscious about the judicial pronouncements including those, referred to above and instead of making provision of blanket deduction of tax at source has by way of Sub-section (2) of Section 34 introduced statutory provision where a person who claims that he either is not liable to pay tax on such sale or is liable to pay such tax on amount lesser than the amount of deduction sought to be deducted to approach the authority concerned for necessary redressal of his grievance. In view of Sub-section (2) of Section 34, the notification issued u/s 34 stands differently than ones they are under consideration before the Apex Court, referred to above. The assessing authority of the contractee part on being satisfied that the contractor is not liable either to pay tax or is liable to pay tax at a lesser rate, may pass appropriate order in this regard. The assessing authority of the contractee has been empowered u/s 34(5) of the Act to pass necessary order on being satisfied that the contractor is either not liable to pay tax or is liable to pay tax at a lesser rate of tax than the rate at which the tax is being sought to be deducted at source. It goes without saying that as and when the concerned authority is approached by such a contractor, necessary order would be passed in this regard by such authority. On a fair reading of the contract agreement the assessing authority, after recording the reasons (may be in brief) is required to pass appropriate order taking into consideration the attending facts and circumstances of the case, within four corners of the Act. The object and purpose of enacting Sub-sections (2), (4), (5) and (14) of Section 34 of the Act is loud and clear, to avoid any such eventuality and to deduct the tax at source where the sale is in respect of taxable goods. The assessing authorities are required to act judiciously so that an honest tax payer may not feel that he is being unnecessarily harassed on account of the notification issued u/s 34 of the Act. While doing so, it goes without saying, the Assessing Authority should safeguard the interest of the Revenue also. It has to strike a balance. Section 34(2) of the Act shall be read as indicated above, otherwise it would amount giving of arbitrary and uncanalised power on the person concerned to deduct up to 4% from the sum payable to the works contractors irrespective of whether ultimately the transaction is liable for payment to any sales tax at all.
24. More or less a similar controversy came up for consideration before the Apex Court under the Income Tax Act, 1961 in respect of deduction of tax at source on ''presumptive basis'' of income in respect of assessee dealing in alcohlic liquor for human consumption, timber obtained under forest lease, timber obtained by any other mode than under a forest lease and any other forest produce not being timber. Section 44AC was inserted in the Income Tax Act with effect from 1-6-1989 and Section 206C was inserted with effect from 1-6-1988 in the Income Tax Act. These Sections enabled the Revenue to estimate the profits on ''presumptive basis''. The business of the above mentioned persons existed only for short period i.e. a year or two. After the period of contract or agreement, it was impossible to trace them out in many cases. It was found that many of them were dealing in Benami names. There was evasion of Income Tax. To plug the loophole, the aforestated provisions were made and their vires was under challenge. The vires of the aforesaid provisions was uphold in the light of the practical difficulties envisaged by the Revenue to locate the persons and collect the tax due on certain traders. It was held that if the Legislature in its wisdom thought that it will facilitate collection of tax due from such specified traders on "presumptive basis", it would not affect Article 14 of the Constitution. However, while doing so, the Apex Court read down the provisions and held that the assessment under the Income Tax Act is still to be made even where the tax is collected u/s 206C of the Income Tax Act. It does not dispense with regular assessment, as provided in accordance with Sections 28 to 43C of the Income Tax Act.
25. In the matter of trade tax also, in the case of contractor in particular, deduction of tax at source is eminently just and proper and reasonable too. A contractor, after completion of the contract, may disappear altogether and it would be difficult for the department to trace him out. The contract works are spread over the years and intermediate payments are made by the contractee to the contractor. Some times the contractors do belong to outside the State in which contract works are being executed. They do not have any office or regular place of business in the State of U.P. They go on shifting from one place to another depending upon exigencies of the contract. It is, therefore, more convenient and easy for such contractors to get the tax deducted at source as and when they receive payments from the contractee. This also absolves them from the cumbersome process of assessment, if they are satisfied with the amount deducted at source and also makes the work of the department easier, to collect the revenue.
26. The argument of the learned Standing counsel that the amount of tax deducted at source would be refunded after assessment if ultimately it is found that no tax was payable by the dealer, is misplaced one. Similar arguments were rejected by the Apex Court in the case of
27. In view of the above discussions, we are of the opinion that in view of Sub-section (2), (4), (5) and (14) of Section 34, the notification in question is a valid piece of subordinate legislation. It does not transgress the limit of Section 34(1) of the Act and safeguard has been provided by enacting Sub-sections (2), (4), (5) and (14) of Section 34. The assessing authority concerned shall when approached by the contractor will issue necessary direction to the contractee with regard to his claim that he is either not liable to pay tax on such sale or is liable to pay tax on amount lesser than the amount of deduction.
28. In the present case, the assessing authority when approached, dismissed the application of the petitioner on the erroneous assumption that no such notification has been issued u/s 34 of the Act. Evidently, the assessing officer, was not justified in rejecting the application on the ground as has been set down in the order. The impugned order dated 12-2-2009 thus, cannot be allowed to stand. The assessing authority is required to reconsider the application of the petitioner afresh in the light of the observations made above in accordance with law. In the result, the writ petition is allowed to the extent stated above but no order as to costs.
