2014 (12) TMI 870 - HC - VAT and Sales Tax

Collection of VAT by way of TDS - Constitutional Validity of provisions of section 34 of U.P. Value Added Tax Act, 2008 and notification dated 7 October 2013 Claim of petitioner being private unaided institutions - Section 34 violates Article 14 of the Constitution and suffer from arbitrariness or not Held that - The validity of legislation cannot be determined on the basis of its crudities or inequities, particularly when matters of classification in fiscal legislation are involved - The legislature is not bound to bring within the fold of a provision for the deduction of tax at source, all possible transactions in order for the collection or recovery machinery to be lawful and valid - It is open to the legislature to impose a requirement that the liability to deduct tax at source would be attracted in those cases where the legislature or its administrative agency appointed under the law believes that the possibility for evasion must be plugged - Here again, it would be impossible for the legislature to envisage a situation where every possibility for evasion is ruled out - the legislature, by conferring a degree of latitude or discretion on the executive, does not breach the requirement of a valid classification under Article 14 of the Constitution. Shashikant Laxman Kale And Another Versus Union of India And Others 1990 (7) TMI 3 - SUPREME Court it has been held that in a taxing statute a greater degree of latitude in matters of classification is permissible, noted that in order to tax something it is not necessary to tax everything - prior to the notification which was issued on 7 October 2013, an earlier notification was issued u/s 34(1) of the VAT Act on 4 March 2008 under which a liability to deduct tax at source was imposed on every person responsible for making payment to a contractor in discharge of a liability under a works contract - The categories of works contracts covered by the notification included transactions between a contractor and several other entities including a University, educational institution and training centre - when the legislation has conferred upon the State a discretion to issue a notification to bring within the purview of section 34(1) certain specific transactions where a liability to deduct tax at source would arise, it is not necessary for the State, in order to sustain the validity of its action, to impose such a liability on every transaction with every conceivable entity - The notification cannot also be read down as sought. The challenge either to the validity of the provisions of section 34(1) or to the validity of the notification dated 7 October 2013 cannot be accepted - the statutory provision is not a charging provision but a provision for collection and recovery of tax - The legislature was entitled to leave it open to the State to fasten a requirement of deducting tax at source in certain specified situations or transactions - sufficient safeguards have been introduced particularly in sub-sections (2) to (6) of section 34, as noted earlier in the course of the judgment - The notification which has been issued on 7 October 2013 has not transgressed either the parameters set out in section 34(1) or the norms of Article 14 - The challenge on the ground that there has been a violation of Article 14 failed Decided against petitioner.

Issues Involved:
1. Validity of Section 34 of the U.P. Value Added Tax Act, 2008.
2. Legality of the notification dated 7 October 2013 issued under Section 34(1) of the VAT Act.
3. Alleged violation of Article 14 of the Constitution.

Detailed Analysis:

1. Validity of Section 34 of the U.P. Value Added Tax Act, 2008:
The petitioners challenged Section 34 of the VAT Act, which deals with the deduction of tax at source, on the grounds of violating Article 14 of the Constitution and arbitrariness. They argued that Section 34(1) confers unfettered and unguided power upon the executive to classify specified persons, cases, and circumstances for deducting tax at source, thereby giving the executive unguided discretion to include or exclude entities.

The court held that Section 34 is not a charging provision but a machinery provision aimed at facilitating the recovery, payment, or collection of tax. The court emphasized that the charging provision of a fiscal legislation must be construed strictly, whereas provisions for machinery and collection should be construed to achieve the purpose of the fiscal levy. The court found that Section 34(1) allows the State Government to issue notifications specifying the circumstances and conditions under which tax should be deducted at source. The court noted that several safeguards are built into Section 34, including provisions for the selling dealer to apply for directions from the assessing authority regarding the deduction amount.

2. Legality of the Notification Dated 7 October 2013:
The notification dated 7 October 2013 imposed a liability to deduct tax equivalent to 4% of the value of goods at source on specified entities, including universities, educational institutions, and training centers. The petitioners argued that there was no justification for including private educational institutions within the ambit of this notification.

The court found that the notification was issued under the statutory power conferred by Section 34(1) and aimed at preventing tax evasion. The court held that the legislature and the executive have a wide degree of latitude in matters of fiscal legislation and classification. It was noted that the legislature is not bound to include every conceivable transaction within the provision for the deduction of tax at source. The court upheld the notification, stating that it did not transgress the parameters set out in Section 34(1) or the norms of Article 14.

3. Alleged Violation of Article 14 of the Constitution:
The petitioners contended that the provisions of Section 34 and the notification dated 7 October 2013 violated Article 14 of the Constitution by creating arbitrary classifications without justification. They argued that private educational institutions should be excluded from the notification's purview or be read as ejusdem generis to include only state-aided institutions.

The court reiterated the presumption of constitutionality that attaches to legislation and emphasized that classification in fiscal legislation does not require scientific exclusion or inclusion of persons or things. The court referred to several Supreme Court judgments, including R.K. Garg Vs. Union of India, to highlight that the legislature enjoys a wide latitude in matters of economic regulation and classification. The court concluded that the classification made by the notification was not palpably arbitrary and was justified in the context of preventing tax evasion.

Conclusion:
The court dismissed the petitions, upholding the validity of Section 34 of the U.P. Value Added Tax Act, 2008, and the notification dated 7 October 2013. The court found no merit in the challenge based on the alleged violation of Article 14, stating that the statutory provision and the notification were within the legislative and executive discretion to target specific transactions for tax deduction at source.

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