2014 (5) TMI 302 - HC - VAT and Sales Tax

Rate of tax Option of Compounding of Tax - Applicability of compounding scheme to agreements - Option to opt out of compounding Scheme Held That - The argument raised by learned counsels appearing for assessees, that once an option is given, they cannot opt out of the scheme and will be bound by the increased rate irrespective of the number of contracts entered into by them is devoid of any substance - The object of the compounding scheme dated 9.6.2009 made u/s 6 (1) of the Act is to provide for compounding at a uniform rate of the tax on the turn over, qua the financial year - The Act does not provide for two or more assessments of commercial tax for the same period, in any financial year; one on a facilitated compounded rate and another by way of regular assessment on the notified rates given in the schedule - The procedure of assessment provided under the Act, restricts the assessment for any period, to only one such assessment - Keeping in view the object of making assessments in a simplified manner without any hassles, an option is provided in the scheme to make applications for compounding of tax for a financial year - Once such an option is exercised, all the contracts entered into either before giving the option or subsequent thereto, for the relevant period covered by the agreement are covered by the compounding scheme - For the subsequent years in case any contract is not completed or the payments are receivable, the same analogy would apply namely that there can not be two assessments for the same period of time, one on compounded basis and another on regular basis. Relying upon Varkisons Engineers v. State of Kerala & Anr., 2009 (4) TMI 433 - SUPREME COURT OF INDIA - Supreme Court held following CIT v. Scindia Steam Navigation Co. Ltd., 1961 (4) TMI 6 - SUPREME Court; CST v. Modi Sugar Mills Ltd. 1960 (10) TMI 65 - SUPREME COURT OF INDIA - The imposition of a different tariff in the mill of the assessment order could be given effect to, if the scheme of the Act provides for proper machinery for computing the tax liability - The Supreme Court also drew distinction between Section 5 of the Kerala General Sales Tax Act, 1963, which deals with normal assessment referring to tax on the turn over, and Section 7 (7), which refers to payment of tax on the amount of contract - The matter was remanded to the Kerala High Court for de novo consideration in accordance with law. Unraised Question - Difficulty in assessment of tax for two periods in the same assessment year - Held That - Assessees have not raised any question with regard to difficulty in assessment of tax for two periods in the same assessment year - The compounding scheme dated 9.6.2009 does not provide for any such eventuality - A dealer has to opt for compounding of tax on the amount of contract or the contracts as the case may be for the entire financial year - The scheme does not provide for any piecemeal option nor provides for any assessment to be made in the same financial year - The amended rate of compounding of tax is applicable prospectively to the applications filed before the commencement of the increased rates of compounded tax This Court do not agree with the learned counsel appearing for assessees, that having applied for compounding, a contractor does not have any option to opt out in any of the subsequent years - In subsequent years, if the applicant is not left with any incomplete contract or a contract in respect of which the payments are receivable, he may not apply for the compounding - In such case, it will be open to the civil contractor or the electrical contractor as the case may be, to make a choice to apply for compounding or subject itself to regular assessments - No merit is found in the grounds for challenging the amendments dated 30.12.2010, to the rates of compounding by the Compounding Scheme for compounding of tax by the building contractors dated 9.6.2009, issued by the State Government u/s 6 - All the writ petitions are dismissed Decided against assessee.

Summary

Issues Involved:
1. Constitutionality of the Forty-Sixth Amendment Act, 1983.
2. Limitations on State Legislatures regarding taxation on works contracts.
3. Composition of tax liability under the U.P. Value Added Tax Act, 2008.
4. Validity of the amended compounding scheme dated 30.12.2010.
5. Applicability of the principle of promissory estoppel.
6. Assessment and compounding of tax for subsequent financial years.

Detailed Analysis:

1. Constitutionality of the Forty-Sixth Amendment Act, 1983:
The Constitution (Forty-Sixth Amendment) Act, 1983, inserted Clause (29-A) in Article 366, enabling State Legislatures to impose tax on the transfer of property in goods involved in the execution of works contracts. The Supreme Court upheld the validity of the Forty-Sixth Amendment in Builders' Association of India v. Union of India (1989) 2 SCC 645, declaring that sales tax laws levying taxes on such transfers are subject to restrictions and conditions mentioned in Article 286 of the Constitution.

2. Limitations on State Legislatures regarding taxation on works contracts:
In Gannon Dunkerley and Co. State of Rajasthan (1993) 1 SCC 364, the Supreme Court laid down limitations for State Legislatures in enacting laws on works contracts. Key points include:
- State Legislatures cannot impose tax on inter-State trade, commerce, or sales outside the State.
- The value of goods involved in works contracts can be determined by deducting expenses for labor and services.
- The legislature may prescribe a formula for deduction of labor and service costs if proper accounts are not maintained.

3. Composition of tax liability under the U.P. Value Added Tax Act, 2008:
Section 3 of the U.P. Value Added Tax Act, 2008, provides for the incidence and levy of tax. Section 6 allows for the composition of tax liability, enabling the assessing authority to accept a composition money in lieu of tax. The State Government published a composition scheme on 09.6.2009, effective from 1.1.2008, for civil works contractors.

4. Validity of the amended compounding scheme dated 30.12.2010:
The State Government amended the compounding scheme on 30.12.2010, increasing the rate of tax from 2% to 4% for contractors using imported goods up to 5% of the total contract. The petitioners challenged this amendment, arguing it was arbitrary and violated principles of natural justice. The Court held that the State Government has the power to increase or decrease the rate of compounding tax under Section 6 (1) of the Act.

5. Applicability of the principle of promissory estoppel:
The Court found that the increased rate of compounded tax at 4% would apply prospectively from 30.12.2010. Petitioners who applied for compounding before this date would not be affected by the increased rate for the period prior to 30.12.2010. Thus, the principle of promissory estoppel could not be invoked.

6. Assessment and compounding of tax for subsequent financial years:
The Court clarified that the compounding of tax is by way of a statutory contract for each financial year. Contractors must opt for compounding for all contracts in the same year and subsequent years. The scheme does not allow for piecemeal options or multiple assessments within the same financial year. Contractors can choose to apply for compounding or subject themselves to regular assessments in subsequent years if no incomplete contracts or receivables are pending.

Conclusion:
The Court dismissed all writ petitions, upholding the amendments to the compounding scheme and affirming the State Government's authority to modify the rate of compounding tax. The judgment emphasized the statutory nature of the compounding scheme and the legislative powers of the State in fiscal matters.