2007 (8) TMI 692 - HC - VAT and Sales Tax

Whether it is permissible for the sales tax authorities, under the TST Act, to direct deduction, at source, of an amount equivalent to four per cent from each bill of the contractor, who has executed a works contract, without taking into account the fact as to whether all the materials used in the execution of a given works contract were or were not exigible to local sales tax? Held that - When rule 3A does not prescribe deduction at source at the flat rate of four per cent, a direction to deduct sales tax at the flat rate of four per cent from the bills of the contractors is clearly beyond the scope of section 3AA read with rule 3A, for, deduction, at source, is permissible only as prescribed by the Tripura Sales Tax Rules, 1976. Thus do not find that the learned single judge has committed any error in interfering with the two memoranda aforementioned and in quashing the same, particularly, when we find that the memoranda, in question, had put on the contractors, who were involved in execution of works contract, a legal obligation far more onerous than the TST Act and the Rules framed thereunder envisaged. In the result and for the reasons discussed above, these appeals fail and the same shall accordingly stand dismissed.

Issues Involved:
1. Legality and validity of the two memoranda dated January 24, 1994, and May 20, 1995.
2. Vires of sections 3A and 3AA of the Tripura Sales Tax Act, 1976.
3. Permissibility of deduction at source of four percent from each bill of the contractor under the TST Act.

Detailed Analysis:

1. Legality and Validity of the Two Memoranda:
The two memoranda directed all heads of departments to deduct at source an amount equivalent to four percent of the total gross amount of each bill for execution of works contracts, except for RCC bridges where 1.57 percent was to be deducted. The court quashed these memoranda on the grounds that the directions to deduct sales tax at a flat rate were beyond the scope of the TST Act and the Rules made thereunder. The court noted that in execution of a works contract, not all items used by a contractor may be subject to local sales tax. Therefore, the memoranda could not be allowed to survive as they imposed a more onerous obligation than what the TST Act envisaged.

2. Vires of Sections 3A and 3AA of the Tripura Sales Tax Act, 1976:
The respondents challenged the vires of sections 3A and 3AA on the grounds that the contractors were not liable to pay sales tax as they were not dealing with the sale of taxable goods and thus were not "dealers" within the meaning of section 2(b) of the TST Act. However, the court upheld the vires of these sections, stating that the provisions were in line with the 46th amendment of the Constitution of India, which empowered the State Government to impose sales tax on the execution of works contracts by deeming such execution as a "sale."

3. Permissibility of Deduction at Source of Four Percent from Each Bill of the Contractor:
The court examined whether it was permissible for the sales tax authorities to direct deduction at source of four percent from each bill of the contractor without considering whether all materials used in the execution of the works contract were exigible to local sales tax. The court referred to sections 3A and 3AA and rule 3A of the TST Rules, which mandate that deductions should be made only for the amount of tax payable on the actual value of goods involved in the works contract. The court found that the memoranda's flat rate deduction was contrary to these provisions, as different rates of tax were imposed on different taxable goods under the Schedule to the TST Act.

The court emphasized that deductions should be as near the amount as the contractor may otherwise be liable to pay. The person responsible for making payments to the contractor has the discretion to refer to the Superintendent of Sales Tax for provisional computation of the net turnover and the amount of tax payable. The court concluded that the impugned memoranda, which mandated a flat rate deduction, were beyond the scope of section 3AA read with rule 3A and thus invalid.

Conclusion:
The appeals were dismissed, and the interim directions, if any, were modified. The court clarified that the observations and holdings were confined to the interpretation of rule 3A as it stood before the twelfth amendment of the Tripura Sales Tax Rules, which came into force on February 8, 2001. No order as to cost was made.

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