2009 (10) TMI 844 - HC - VAT and Sales Tax

Notification dated March 4, 2008 issued by the State Government - whether unconstitutional and ultra vires to the U.P. Value Added Tax Act, 2008 ? Held that - In view of sub-sections (2), (4), (5) and (14) of section 34, the notification in question is a valid piece of subordinate legislation. It does not transgress the limit of section 34(1) of the Act and safeguard has been provided by enacting subsections (2), (4), (5) and (14) of section 34. The assessing authority concerned shall when approached by the contractor issue necessary direction to the contractee with regard to his claim that he is either not liable to pay tax on such sale or is liable to pay tax on amount lesser than the amount of deduction. In the present case, the assessing authority when approached, dismissed the application of the petitioner on the erroneous assumption that no such notification has been issued under section 34 of the Act. Evidently, the assessing officer, was not justified in rejecting the application on the ground as has been set down in the order. The impugned order dated February 12, 2009 thus, cannot be allowed to stand. The assessing authority is required to reconsider the application of the petitioner afresh in the light of the observations made above in accordance with law. In the result, the writ petition is allowed to the extent stated above but no order as to costs.

Summary

Issues Involved:
1. Quashing of the notification dated March 4, 2008, under the U.P. Value Added Tax Act, 2008.
2. Quashing of the order dated February 12, 2009.
3. Issuance of a writ of mandamus to prevent tax deduction at source for the petitioner.

Issue-wise Detailed Analysis:

Quashing of the Notification Dated March 4, 2008
The petitioner challenges the notification dated March 4, 2008, issued under section 34(1) of the U.P. Value Added Tax Act, 2008, which mandates a four percent tax deduction at source on works contracts. The petitioner argues that the notification is unconstitutional and ultra vires, as it does not provide any exception for pure works contracts, which do not involve the transfer of property in goods. The petitioner contends that such contracts should not be subject to tax deduction at source, and if the notification mandates this, it exceeds the powers conferred by the Act.

Quashing of the Order Dated February 12, 2009
The petitioner also seeks to quash the order dated February 12, 2009, by the assessing authority, which rejected their application for exemption from tax deduction at source. The rejection was based on the ground that section 34(13) mandates a four percent deduction and that no notification under section 34(1) exempts such deductions. The petitioner argues that the assessing authority misinterpreted the law and facts, as the notification dated March 4, 2008, does exist and is under challenge for its validity.

Issuance of a Writ of Mandamus
The petitioner seeks a writ of mandamus to prevent the respondents, including the Deputy Commissioner of Commercial Taxes and Indo Gulf Fertilizers, from deducting tax at source under the said Act for the work order dated August 29, 2008. The petitioner claims that the contract is purely for labor and does not involve any transfer of property in goods, thus should not be subject to tax deduction at source.

Court's Analysis:

Legislative Competence and Validity of Notification
The court noted that section 34 of the Act replaced section 8D of the U.P. Trade Tax Act, whose validity had been upheld in previous judgments. The petitioner did not challenge the validity of section 34 itself but only the notification issued under it. The court emphasized that the notification should be read in conjunction with section 34(1) and (2), which allows for tax deduction at source for works contracts involving the transfer of property in goods.

Mechanism for Determination of Tax Liability
The court referred to rule 9 of the Rules framed under the Act, which provides a mechanism for determining the turnover of goods involved in works contracts. The rule allows for deductions of amounts representing the value of goods consumed in the execution of works contracts, where property in goods is not transferred. The court highlighted that the notification must be interpreted within the framework of section 34, which includes provisions for addressing claims that no tax is payable or that a lesser amount is due.

Judicial Precedents
The court examined several precedents, including Steel Authority of India Ltd. v. State of Orissa, Nathpa Jhakri Jt. Venture v. State of Himachal Pradesh, and State of Chhattisgarh v. VTP Constructions. These cases dealt with the legislative competence of state laws requiring tax deduction at source for works contracts involving inter-State sales, outside sales, or import sales. The court noted that the present case did not involve such categories and was limited to intra-State transactions within U.P.

Safeguards and Judicial Review
The court pointed out that sub-sections (2), (4), (5), and (14) of section 34 provide safeguards against arbitrary tax deductions. These provisions allow contractors to seek directions from the assessing authority if they believe they are not liable for tax or are liable for a lesser amount. The court emphasized that the assessing authority must act judiciously and balance the interests of the taxpayer and the Revenue.

Conclusion
The court concluded that the notification dated March 4, 2008, is valid and does not exceed the powers conferred by section 34 of the Act. However, the order dated February 12, 2009, was based on an erroneous assumption and must be reconsidered. The court directed the assessing authority to review the petitioner's application afresh, considering the observations made in the judgment.

Final Judgment:
The writ petition is allowed to the extent that the order dated February 12, 2009, is quashed. The assessing authority is directed to reconsider the petitioner's application in accordance with the law and the court's observations. No order as to costs.