2012 (3) TMI 423 - HC - VAT and Sales Tax

Injunction against deduction of tax at source - works contract - petitioner is to set up MSWAN to modernize the communication set up for the Meghalaya Government on BOOT basis - no tax liability certificate - Held that - It is well settled that under the provisions of sale tax law, deduction of tax at source is permissible with reference to prima facie taxable value of the transaction and deduction of tax at source cannot be de hors the tax liability of a dealer. State legislature cannot allow deduction from bills de hors the same - there was no proposal to make deduction of tax at source from the entire transaction value but only from such value as is found to be tentative taxable turnover - respondent may determine prima facie taxable turnover, if any, in the transaction involved and make such deduction as appears to be the tax liability of the petitioner - petition disposed off.

Summary

Issues:
Petition seeking injunction against tax deduction at source from bills for services rendered under an agreement. Dispute regarding tax liability under VAT Act and service tax applicability.

Analysis:

The petitioner entered into an agreement to set up a Meghalaya State Wide Area Network (MSWAN) for the government on a Build-Own-Operate and Transfer (BOOT) basis. The petitioner submitted bills for services rendered under the agreement and requested certificates of non-liability under the Meghalaya Value Added Tax Act, 2003, which were denied by the Commissioner of Taxes. The petitioner argued that the services provided fall under Section 65(105)(zzzze) of the Finance Act, 1994, subject to service tax, with no sale of goods involved. The petitioner relied on the BSNL vs. Union of India judgment to assert that service tax and VAT are mutually exclusive.

The State of Meghalaya contended that the transaction involved both services and the sale of goods, thus attracting tax deduction at source. The State argued that the determination of taxable turnover under VAT law was pending and could not be preempted by a writ petition. The court noted that tax deduction at source must align with the tax liability of a dealer, as established in legal precedents like Steel Authority of India vs. State of Orissa and Rapti Commission Agency vs. State of U.P.

The court concluded that while there was no dispute on the principle, the determination of prima facie taxable turnover and subsequent tax deduction should be carried out by the concerned authority within one month. The deducted tax amount was to be paid to the department and subjected to assessment promptly, preferably within three months from the deduction date, considering the substantial amount involved in the case.

In summary, the judgment directed the determination and deduction of tax at source based on the prima facie taxable turnover of the transaction, emphasizing alignment with the tax liability of the petitioner. The court deferred detailed examination of the issues raised for appropriate proceedings, focusing on expeditious assessment and resolution of the tax liability matter.