2010 (5) TMI 854 - HC - VAT and Sales Tax

Constitutional validity of Section 41 of the BVAT Act, 2005 - vires of Rule 29 of VAT rules - works contract - distinction between a non obstante clause and subject to - interpretation of statute -

Issues Involved:
1. Constitutional validity of Section 41 of the Bihar Value Added Tax Act, 2005.
2. Constitutional validity of Rule 29 of the Bihar Value Added Tax Rules, 2005.
3. Mechanism for advance recovery of tax from works contractors.
4. Legislative competence of the State Legislature to impose tax on inter-State sales, outside sales, and sales in the course of import.
5. Adequacy of machinery provisions for tax determination and deduction.

Issue-wise Detailed Analysis:

1. Constitutional Validity of Section 41 of the Bihar Value Added Tax Act, 2005:
The petitioners challenged the constitutional validity of Section 41 of the VAT Act, arguing that it mandated the deduction of tax at source from the bills raised by works contractors without a proper mechanism for determination. They contended that this provision was arbitrary, unreasonable, and violated Article 14 of the Constitution of India. The court noted that Section 41 begins with "Subject to the provisions of section 6," which excludes inter-State sales, outside sales, and sales in the course of import from the tax net. The court held that the provision, as it stands, does not suffer from legislative incompetence and provides adequate guidance and mechanism for tax deduction, making it intra vires.

2. Constitutional Validity of Rule 29 of the Bihar Value Added Tax Rules, 2005:
Rule 29 of the VAT Rules was also challenged on similar grounds. The petitioners argued that the rule allowed for tax deduction on items beyond the legislative competence of the State Legislature. The court observed that Rule 29 specifies that no deduction shall be made on account of payments pertaining to labor charges, amounts paid to sub-contractors, charges for planning and designing, and other similar expenses. The court found that Rule 29 provides a clear mechanism for deductions and exclusions, making it consistent with the VAT Act and intra vires.

3. Mechanism for Advance Recovery of Tax from Works Contractors:
The petitioners argued that the VAT Act lacked a proper mechanism for the determination of tax at the pre-assessment stage, leading to arbitrary deductions. They cited the decision in Larsen and Toubro Ltd. v. State of Bihar, which held that a similar provision under the Bihar Finance Act was unworkable. The court distinguished the present provision from the earlier one, noting that Section 41 provides for obtaining a certificate from the Deputy Commissioner, Commercial Taxes, or other specified authorities, which serves as a machinery provision for tax determination. The court held that the provision is reasonably workable and does not impose an undue burden on contractors.

4. Legislative Competence of the State Legislature to Impose Tax on Inter-State Sales, Outside Sales, and Sales in the Course of Import:
The petitioners contended that the State Legislature lacked the competence to impose tax on inter-State sales, outside sales, and sales in the course of import. The court referred to the decisions in Steel Authority of India Ltd. v. State of Orissa and Nathpa Jhakri Joint Venture v. State of Himachal Pradesh, which held that State Legislatures cannot levy tax on such sales. The court noted that Section 41 of the VAT Act explicitly excludes these sales from the tax net, making the provision consistent with constitutional limitations and within the legislative competence of the State Legislature.

5. Adequacy of Machinery Provisions for Tax Determination and Deduction:
The petitioners argued that the VAT Act lacked adequate machinery provisions for tax determination, leading to arbitrary and unreasonable deductions. The court observed that Section 41 and Rule 29 provide a comprehensive mechanism for tax deduction, including obtaining certificates from specified authorities and excluding non-taxable items. The court held that the provision is not arbitrary or unreasonable and provides sufficient guidance for tax determination, making it intra vires.

Conclusion:
The court concluded that Section 41 of the VAT Act and Rule 29 of the VAT Rules are intra vires and do not suffer from any constitutional infirmities. The writ petitions were dismissed, and the provisions were upheld as valid.

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