2007 (10) TMI 579 - HC - VAT and Sales Tax

Legality of Circular No. VIII(i)6/99-16715/CT dated July 30, 1999 and also circular No. III(1)/94/982935/CT dated February 9, 2001 issued by the Commissioner of Commercial Taxes challenged - Held that - The circulars which have been impugned in this case and which have been noted hereinabove, cannot be treated to be a valid basis for assessment. In order to constitute valid basis for taxation, the rate of deduction, specially a flat rate of deduction cannot be applied to calculate the taxable turnover in works contract. So those circulars cannot hold the field. As stated in the judgments referred to above, in the absence of any statutory basis for calculation of taxable turnover, the Act remains unworkable. Such gap in the statute cannot be filled up by the circulars which are purely ad hoc and administrative in nature and specially so when it relates to taxing law. Therefore, the impugned circulars are set aside as also the impugned orders of assessment. The assessee s liability to pay tax remains but in order to assess that the State has to act in accordance with the statutory prescription by framing Rules under its rule-making power under section 29 of the Act and the assessing authority can pass fresh orders of assessment on the basis of such statutory Rules.

Issues Involved:

1. Validity of assessment orders.
2. Legality of Circulars issued by the Commissioner of Commercial Taxes.
3. Requirement of statutory rules for deductions in works contract.
4. Applicability of Supreme Court judgments in works contract cases.

Issue-wise Detailed Analysis:

1. Validity of Assessment Orders:
The petitioner challenged the assessment orders for the financial years 2004-05 and 2005-06, claiming that the assessing officer wrongly rejected their claims for exemption of turnover towards labor and service charges as well as payments made to sub-contractors. The court noted that the assessment orders were primarily based on circulars issued by the Commissioner of Commercial Taxes, which lacked statutory backing. The court emphasized that an assessment order cannot be sustained if it is based on circulars without statutory authority, making the assessment orders ultra vires.

2. Legality of Circulars Issued by the Commissioner of Commercial Taxes:
The petitioner argued against the legality of Circular No. VIII(i)6/99-16715/CT dated July 30, 1999, and Circular No. III(1)/94/982935/CT dated February 9, 2001, issued by the Commissioner of Commercial Taxes. These circulars provided guidelines for assessing officers on deductions for labor charges and service charges in works contracts. The court found that these circulars were administrative instructions without any statutory basis and thus could not form the basis for valid assessments. The court held that taxation must be backed by statutory provisions or rules, and administrative instructions alone are insufficient.

3. Requirement of Statutory Rules for Deductions in Works Contract:
The court highlighted the necessity for statutory rules to ascertain deductions in works contracts, as mandated by the Supreme Court in the case of Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204. The court noted that the Orissa Sales Tax Act required deductions to be prescribed by rules, but no such rules had been framed. The absence of these rules rendered the Act unworkable for determining taxable turnover in works contracts. The court emphasized that the legislative obligation to provide guidelines for tax deductions could not be fulfilled by ad hoc circulars.

4. Applicability of Supreme Court Judgments in Works Contract Cases:
The court referred to the Supreme Court's judgments in Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204 and Builders Association of India v. Union of India [1989] 73 STC 370, which provided clear guidelines for determining the value of goods in works contracts. The court reiterated that deductions for labor and service charges must be based on statutory rules and not on administrative circulars. The court also noted that the Supreme Court's decision in Gannon Dunkerley had significantly changed the legal landscape for works contracts, making it the governing judgment.

Conclusion:
The court concluded that the impugned circulars could not form a valid basis for assessment as they lacked statutory backing. It set aside the circulars and the assessment orders, stating that the State must frame rules under its rule-making power to provide a statutory basis for deductions in works contracts. The court allowed the writ petitions, emphasizing the need for statutory compliance in taxation matters and invalidating the assessments based on administrative instructions.

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