2009 (9) TMI 880 - HC - VAT and Sales Tax

Legislative competence of the State of Meghalaya to enact section 106 of the Meghalaya Value Added Tax Act, 2003 questioned Held that - Legislative competence of the State of Meghalaya to enact section 106 of the Meghalaya Value Added Tax Act, 2003. Consequently, the State-respondents or the person or persons or body responsible for making tax deduction at source shall hereafter deduct the advance tax at the rate of 12.5 per cent only from the taxable turnover of the value of the works contract of all the petitioners of these 13 (thirteen) writ petitions. Excess payments, if any, on account of the tax deductions at source made by any of the respondents heretofore in terms of the interim orders of this court shall be refunded to all the petitioners at once along with the interest admissible under the law. Conversely, if there is any deficiency in the collection towards deduction of tax at source in terms of the interim orders, it shall be open to the Staterespondents to recover the same from each of the petitioners in the manner permissible by law. The writ petitions are disposed in the above terms, but without costs.

Issues Involved:
1. Legislative competence of the State of Meghalaya to enact Section 106 of the Meghalaya Value Added Tax Act, 2003.
2. Validity of tax deductions at source under Section 106.
3. Compliance with constitutional provisions, particularly Articles 14, 19(1)(g), 265, 286, and 300-A.
4. Mechanism for determining taxable turnover and permissible deductions.

Issue-Wise Detailed Analysis:

1. Legislative Competence of the State of Meghalaya:
The petitioners challenged the legislative competence of the State of Meghalaya to enact Section 106 of the Meghalaya Value Added Tax Act, 2003. The court examined whether the State Legislature could impose tax deductions at source on the total value of works contracts without considering deductions mandated by Section 5(2) of the Act. The court held that Section 106 is a mechanism section ancillary to the charging section (Section 5), and it must conform to the charging section. The court found that Section 106 does not provide a mechanism for confining the quantum of advance tax to the tax attributable to the taxable turnover, which should include deductions for exempted goods, inter-State sales, outside sales, and sales in the course of import/export.

2. Validity of Tax Deductions at Source:
The court determined that Section 106, as currently framed, does not make provision for the deduction of exempted goods, inter-State sales, outside sales, and sales in the course of import/export. This omission makes the provision beyond the legislative competence of the State Legislature. The court emphasized that tax liability with reference to a works contract can arise only on the taxable turnover, which must exclude exempted goods and certain sales. The court noted that while adjustment is possible at the time of assessment, it is not permissible to impose advance tax that is not exigible to tax.

3. Compliance with Constitutional Provisions:
The petitioners argued that Section 106 violates Articles 14, 19(1)(g), 265, 286, and 300-A of the Constitution. The court agreed that the provision, as it stands, transgresses constitutional limitations imposed by Entry 92A of the Union List read with Article 286, which prohibits the State Legislature from imposing sales tax on inter-State sales, outside sales, and sales in the course of import/export. The court held that the State Legislature cannot levy tax deduction at source on the total value of works contracts without considering these constitutional restrictions.

4. Mechanism for Determining Taxable Turnover and Permissible Deductions:
The court highlighted the need for a proper mechanism to determine taxable turnover, which should include permissible deductions for labor, services, and other charges as specified in Section 5(2) of the Act. The court noted that the impugned Section 106 does not align with the charging section and fails to account for these deductions. The court emphasized that the mechanism for tax deduction at source must strictly conform to the charging section and cannot permit tax deduction or collection in respect of exempted goods.

Conclusion:
The court concluded that Section 106 of the Meghalaya Value Added Tax Act, 2003, is ultra vires the Constitution of India. However, to save the provision from unconstitutionality, the court read down Section 106 to mean that tax deduction at source should be made at the rate of 12.5% only from the taxable turnover of the value of the works contract. The court directed that excess payments made under the interim orders should be refunded to the petitioners with interest, and any deficiency in collection should be recovered by the State-respondents as per law. The writ petitions were disposed of accordingly, without costs.

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