2009 (3) TMI 925 - HC - VAT and Sales Tax

Deduction of tax at source at a uniform or flat rate - Held that - Since no uniform rate has been prescribed in respect of the goods used in the works contract , it clearly follows that the deduction of tax, at the rate of 12.5 per cent, in terms of section 47A and the impugned notification issued by the respondents, are contrary to section 4 and, hence, the same are liable to be struck down. Also when section 4 has not provided for any separate rate of tax in so far as the goods used in the execution of works contract is concerned, the provisions of section 47A of the Act of 2005 providing for deduction at source, at the rate of 12.5 paise in the rupee, are contrary to section 4 of the Arunachal Pradesh Goods Tax Act, 2005, and, therefore, the same are, as rightly contended on behalf of the petitioner, ultra vires and illegal and liable to be struck down. Writ petitions stand allowed and the impugned provisions of section 47A of the Act, to the extent that the same permit deduction at the flat rate of 12.5 per cent irrespective of the taxable turnover , are hereby set aside and quashed.

Summary

Issues Involved:
1. Legality and validity of Section 47A of the Arunachal Pradesh Goods Tax Act, 2005.
2. Legislative competence of the State to enact Section 47A.
3. Constitutional limitations on the State's power to impose sales tax.
4. Mechanism for deduction of tax at source in works contracts.
5. Compliance with Article 265 and Article 286 of the Constitution of India.

Detailed Analysis:

1. Legality and Validity of Section 47A:
The petitioner challenged Section 47A of the Arunachal Pradesh Goods Tax Act, 2005, which mandates a flat deduction of 12.5% tax at source on the total value of works contracts. The petitioner argued that this provision does not account for components not liable to tax, such as labor and services, and thus forces the contractor to pay more than their actual tax liability.

2. Legislative Competence of the State:
The court examined the legislative competence of the State under Article 246(3) and entries 52 and 54 of List II of the Seventh Schedule of the Constitution. The State's power to enact laws on sales tax is subject to restrictions under Article 286 and the Central Sales Tax Act, 1956. The court held that the State legislature exceeded its competence by enacting Section 47A, which mandates tax deduction on amounts not exigible to tax.

3. Constitutional Limitations:
Article 286 imposes restrictions on the State's power to levy sales tax on transactions occurring outside the State, in the course of inter-State trade, or in the course of import/export. The court noted that Section 47A does not distinguish between taxable and non-taxable transactions, thus violating Article 286 and the limitations imposed by the Central Sales Tax Act, 1956.

4. Mechanism for Deduction of Tax at Source:
Section 47A mandates a flat deduction of 12.5% tax at source on the total value of works contracts, without excluding non-taxable components such as labor and services. The court emphasized that the deduction mechanism must account for the actual taxable turnover, excluding components not liable to tax. The court cited the Supreme Court's decision in Gannon Dunkerley & Co. v. State of Rajasthan, which held that the value of goods in works contracts should exclude labor and service charges.

5. Compliance with Article 265 and Article 286:
Article 265 of the Constitution states that no tax shall be levied or collected except by authority of law. The court held that Section 47A violates Article 265 by mandating tax deduction on non-taxable components, leading to illegal tax collection. The court also highlighted the decision in Steel Authority of India Ltd. v. State of Orissa, which declared similar provisions ultra vires for not excluding inter-State sales, outside sales, and export sales from tax deduction.

Conclusion:
The court declared Section 47A of the Arunachal Pradesh Goods Tax Act, 2005, ultra vires and illegal, as it mandates a flat rate deduction of 12.5% without accounting for non-taxable components. The court quashed the impugned provisions and the notice issued by the Superintendent of Tax and Excise, West Kameng, District Bomdila. The judgment emphasized the need for tax deduction mechanisms to comply with constitutional provisions and statutory limitations.