2000 (2) TMI 729 - SC - VAT and Sales Tax

Deduction of tax at source from the payment to works contractors - Held that - The appeal is allowed and the judgment and order under appeal is set aside. Section 13-AA of the Orissa Sales Tax Act, as amended with effect from October 4, 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 13-AA shall forthwith be refunded by the State.

Issues Involved:
1. Constitutionality of Section 13-AA of the Orissa Sales Tax Act.
2. Scope of State Legislature's power to levy sales tax.
3. Validity of deduction of tax at source in respect of works contracts.
4. Penalty imposed for non-compliance with Section 13-AA.
5. Appellant's standing to challenge the validity of Section 13-AA.

Detailed Analysis:

1. Constitutionality of Section 13-AA of the Orissa Sales Tax Act:
The Supreme Court examined the constitutionality of Section 13-AA, which mandated the deduction of sales tax at source from payments made to contractors for works contracts. The original Section 13-AA was struck down by the Orissa High Court in 1993 for being discriminatory and confiscatory. The amended Section 13-AA, enacted on October 4, 1993, was challenged on similar grounds.

2. Scope of State Legislature's Power to Levy Sales Tax:
The Court noted that under Entry 54 of List II of the Seventh Schedule read with Article 246 of the Constitution, States are empowered to levy taxes on the sale or purchase of goods. However, Article 286(1) prohibits States from taxing sales that occur outside the State or in the course of import/export. The Court emphasized that the States cannot levy sales tax on inter-State sales, outside sales, or sales in the course of import, as per Sections 3, 4, and 5 of the Central Sales Tax Act, 1956.

3. Validity of Deduction of Tax at Source in Respect of Works Contracts:
The Court analyzed the provisions of the amended Section 13-AA, which required the deduction of 4% of the value of works contracts exceeding Rs. 1 lakh, regardless of whether the contract involved inter-State sales or sales in the course of import. The Court found that the deduction mechanism did not account for transactions that were not taxable by the State, thereby exceeding the State Legislature's powers.

4. Penalty Imposed for Non-Compliance with Section 13-AA:
The appellant, a steel plant, had deducted sales tax at source only for parts of the contract that were within the State's purview and not for inter-State or import transactions. The Commercial Tax Officer imposed penalties for non-compliance with Section 13-AA. The Court held that the penalties were unjustified as the appellant had correctly interpreted the limits of the State's taxing authority.

5. Appellant's Standing to Challenge the Validity of Section 13-AA:
The Court rejected the State's contention that only the contractor, whose money was being deducted, had the standing to challenge the validity of Section 13-AA. The appellant, being penalized for non-compliance, had the standing to contest the section's validity.

Judgment:
The Supreme Court allowed the appeal, set aside the judgment of the Orissa High Court, and struck down Section 13-AA of the Orissa Sales Tax Act as being beyond the legislative competence of the State. The Court ordered the State to refund any amount collected under the provisions of Section 13-AA to the appellant. The appeals in related cases were also allowed, and similar directions for refunds were issued. No order as to costs was made.

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