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TMI Blog2014 (7) TMI 1373X X X X Extracts X X X X X X X X Extracts X X X X ..... ract which involves transfer of property in goods whether as goods or in some other form and also labour and service. As per Section 44(5), any tax deducted at source paid to the State Government shall be adjustable by the payee on the authority of the certificate issued to him under subsection (4) with the tax payable to him under the Act. Having regard to the various provisions of the Act under the VAT regime, there is no question of the dealers waiting for years to get back the refund of any excess amount deducted from him. In this regard, Revenue has submitted the monthly returns filed by the petitioner which shows that in the monthly returns filed by the petitioner, tax deducted at source was adjusted from the tax payable by the petitioner. The tax deduction at source commonly referred to as TDS is also known as withholding tax . The TDS provisions are meant for tentative deduction of tax subject to regular assessment. The Act does not conceive a situation that there would be a pre-assessment prior to the assessment by the Assessing Authority - there are no merit in the contention of the petitioner that the contractee is under an obligation to exclude the component of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... works contract in the State. Since the notification was issued in exercise of power under Section 44(1) of the Act, the notification is not be read in isolation but to be read along with the Scheme and other provisions of the Act - The Scheme of the Act provides for filing of monthly/periodical/annual returns, deductions to be made as prescribed under the Act and assessment by the competent authorities. In terms of Section 2(lvi), taxable turnover means turnover on which dealer shall be liable to pay tax as determined after making such deductions from his total turnover and in such manner as may be prescribed. As per Rule 22(1)(d), the value of goods involved shall be taxable after deducting from it the charges as indicated in Rule 22(1)(d)(i) to (vii) where the amount of charges towards labour and service, hire charges or any other like charges in any contract are not ascertainable, in terms of Rule 22(2), such charges shall be calculated at the prescribed percentage as indicated in Rule 22(2) - The various provisions of the JVAT Rules, in particular Rules 22 and 23, stipulate various provisions for deductions to be made including labour and service charges and the Notificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, Baraj Division, Galudih :- (i) Agreement No.19F-2/07-08 dated 22.2.2008 Construction of Baharagor Distributory (OR-65)Ex-127.88 of Chandil left main canal (Earth work, Lining and all structures) Agreement Value Rs.39,66,40,438/- (ii) Agreement No.01/F-2/08-09 dated 14.05.2008 Construction of Earth work, Lining and all structures of Manusmuria Distributory (OL-66)Ex Km.127.88 of Chandil left main canal (8.85Km to 19.835 Km) Agreement Value Rs.22,37,75,271/- 3. Case of the petitioner is that as per the provision of Section 44 of JVAT Act and Rule 23 of JVAT Rules, TDS is required to be deducted from the valuable consideration paid to the petitioner after deducting the amount of labour and service charges. Grievance of the petitioner is that in contravention of the said provision, TDS at a specified rate is being deducted by the State of Jharkhand from the entire bill of the petitioner, including labour and service charges. A letter no.521 dated 11.10.2011 was sent by the Deputy Commissioner of Commercial Taxes (respondent no.5) to the 7 th respondent and the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are mis-interpreting the statutory provisions under Section 44 of the JVAT Act 2005 read with rule 23 of the JVAT Rules read with Notification No. SO 208 dated 31.3.2006, a direction is to be issued to the respondents not to deduct tax from the entire gross bill of the petitioner but only on the value of transfer of property in goods used in execution of works contract. 5. To support his contention, learned Senior Counsel has relied upon the decisions rendered in the cases of Larsen Toubro Ltd. v. State of Bihar Ors. [117 STC 41 (PAT)], Bhawni Cotton Mills Ltd. v. State of Punjab [AIR 1967 SC 1616], Steel Authority of India Ltd. v. State of Orissa [(2000) 3 SCC 200], Nathpa Jhakri (Joint Venture) v. State of Himachal Pradesh Ors. [(2000) 3 SCC 319] and other decisions. 6 . Learned Additional Advocate General, Mr.Ajit Kumar, has submitted that the works contract granted to the petitioner is a composite work which consists of earth work, lining and all structures by a single work order and transfer of goods (whether as goods or in some other form) is involved in the works contract and deduction of TDS from the entire bill of the petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portion whereas an indivisible works contract cannot be taxed as sale . This necessitated the 46 th Constitutional Amendment wherein a new Sub- Article (29A) was introduced to Article 366 of the Constitution. Through this provision, six types of transactions which, under the conventional definition of sale would not mean sale , have now become Deemed Sale . One such transaction is taxing the indivisible Works Contract: Article 366 (29A)(b) reads as:- Tax on the sale or purchase of goods includes a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. After 46 th amendment by virtue of Article 366(29A)(b), it had become possible for the States to levy sales tax on the value of goods involved in the works contract in the same way in which the sales tax was leviable on the price of goods and materials supplied in works contract. Upholding the constitutional validity of 46 th amendment, Hon ' ble Supreme Court in the case of Builders Association of India and Others v. Union of India and Others [(1989) 2 SCC 645] held as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of labour and services; (h) profit earned by the contractor to the extent it is relatable to supply of labour and services. The amounts deductable under these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor. Re: Section 44 of JVAT Act and other relevant provisions 10. In order to appreciate the contention of the petitioner, the legal provisions of JVAT Act 2005 and the JVAT Rules 2006 are to be referred to. Section 44 of the JVAT Act speaks about the special provisions relating to deduction of tax at source from the valuable consideration payable to the contractors for the execution of works contract allotted to them. Section 44 reads as under:- 44. Special Provisions relating to Deduction of Tax at source in certain Cases- (1) The State Government may, having regard to the effective recovery of tax, require in respect of contractors or any other class or classes of dealers that any person making payment of any valuable consideration to them for the execution of a works contract in the State involving transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the tax as required by or under sub-Section (3), then, the authority referred to in sub-Section (3) may, at any time within five years of the close of the year when he failed to do so, by order in writing, direct him, after giving him a reasonable opportunity of being heard, to pay, by way of penalty, a sum equal to the amount of tax which he failed to deduct or pay as aforesaid . 11. At the time of filing returns, as per Section 44(5) of the Act, any tax paid to the State Government in accordance with sub-section (3) of Section 44 shall be adjustable by the payee on the authority of the certificate issued to him and the Assessing Authority shall allow the benefit of adjustments after due verification of the payments. 12. For smooth and proper implementation of the provisions of JVAT Act, in exercise of powers conferred by Section 94 of JVAT Act, JVAT Rules 2006 have been framed. Rule 23 deals with tax deducted at source by any contractee pertaining to works contract. Rule 23 reads as under:- 23. Tax Deduction at Source (1) (a) Where a works contract is awarded to a VAT dealer by any contractee and where the contractee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in goods is involved, the said deduction is to be made on the valuable consideration only after deducting therefrom the amount paid towards labour and service charges. Grievance of the petitioner is that in the Notification SO 208 dated 31.3.2006, no provision has been made for deducting the amount of labour and service charges from the value of bill before making TDS. According to the petitioner, in Annexure 11 (dated 11.3.2013), respondent no.5 ordered for deduction of TDS on the entire bill amount of the petitioner including the earthwork, which is wholly arbitrary. In sum and substance, the contention of the petitioner is that the contractee cannot deduct tax at source on the whole amount including earth work which involves labour and service charges and the deduction of TDS from the entire bill without deducting labour and service charges is not in accordance with the provisions of Article 366 (29A) and the principles laid down in Gannon Dunkerley Co. v. State of Rajasthan [1993 (88) STC 204 (SC)] and other judgments of Hon ' ble Supreme Court. Further contention of the petitioner is that if a person is not liable for payment of tax at all, the plea that on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. It was then contended by learned counsel for the State that the Preamble of the Orissa Sales Tax Act took account of the fact that that statute was limited to the sale or purchase of goods in Orissa. Unfortunately, it would appear that the State Legislature overlooked its limitations, even as contained in the Preamble, when enacting Section 13-AA. It was also contended that the deduction that was required to be made under Section 13-AA(1) was of four per cent of the amount credited or paid by the owner to the contractor, whereas the sales tax liability of the contractor thereon was eight per cent. It was contended that this requirement proceeded on the assumption that half of the amount was not liable to tax being in respect of inter-State sales, outside sales and export sales. No such assumption based on the rate of tax at any given point of time can be made. Section 13-AA should have been precisely drafted to make it clear that no tax was levied on that part of the amount credited or paid that related to inter-State sales, outside sales and sales in the course of import, particularly after the previous Section 13-AA had been struck down by the Orissa High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a and Ors. [(2003) 129 STC 401], V.T.P Constructions v. State of Chhattisgarh [(2006) 145 STC 185], State of Chhattisgarh Ors. v. V.T.P Constructions [(2008) 2 SCC 578] and also State of A.P v. Larsen Tourbo Ltd. [(2008) 9 SCC 191]. 17. Reliance was also placed on the case of Larsen and Toubro Ltd. v. State of Bihar Ors. [(2000) 117 STC 41 (PAT)] to contend that the mechanism for TDS should be rational and have independent connection with the tax and there is no rationale in making deduction of tax at source on those components over which State Legislature has no competence to levy tax and thereafter making the assessee to file application for refund of excess amount. In the said case, the vires of Section 25A of the Bihar Finance Act regarding deduction of sales tax at source from the contractors ' bills was in question. If the contractee or any other person making payment, makes deduction under Section 25-A of the Bihar Finance Act on the full or gross value of the works contract, the amount deducted can be adjusted against the amount of tax finally assessed by the department at the time of assessment, and if the same is found to be in excess it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... magis valeat quam pereat . 21. In State of M.P. Vs. Narmada Bachao Andolan [(2011) 7 SCC 639] the Hon ' ble Supreme Court held, the construction that results in hardship, serious inconvenience or anomaly or gives unworkable and impracticable results, should be avoided. 22. The judgments relied upon by the petitioner [except State of A.P v. Larsen Toubro Ltd. (2008) 9 SCC 191 ] refer to tax deducted at source under the Sales Tax Act. Presently we are in VAT regime, whereby every registered dealer is to file monthly/periodical/annual returns claiming deduction as prescribed or making adjustments of input tax credit. VAT being the State subject, each State has its own separate laws governing the levy of tax, rate of tax, tax deducted at source, filing of returns etc. 23. As discussed earlier, the Scheme of the JVAT Act being self contained, stands on a different footing. In terms of Section 29 of the Act, it is mandated upon every registered dealer to file periodical returns adjusting input credit and making deductions as prescribed under the Act. Section 44 stipulates deduction of tax at source to be made by the contracte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d such and any tax paid to the State government shall be adjustable by the payee, on the authority of the certificate issued under sub-section 4. The vires of Section 44 of the JVAT Act, 2005 is not under challenge. The tax deduction at source commonly referred to as TDS is also known as withholding tax . The TDS provisions are meant for tentative deduction of tax subject to regular assessment. The Act does not conceive a situation that there would be a pre-assessment prior to the assessment by the Assessing Authority. 26. Further, the extent of the component of labour and service is essentially a question of fact to be determined on the terms and conditions of the contract, nature of the work and subject to production of documents at the time of assessment. In Gannon Dunkerley Co. v. State of Rajasthan [1993 (88) STC 204 (SC)] , the Hon ' ble Supreme Court has categorically pointed out that the expenses deductible under various heads incurred for labour and services would have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor. At the time of assessment of the registered dealer, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which earth work is also included will be necessary. 29. So far as rate at which tax to be deducted in advance in respect of works contracts, Government issued Notification SO 208 dated 31.3.2006 (Annexure 1), prescribing the rate at which deduction is to be made. As per the said Notification, 2% TDS to be deducted on the works contract subject to the restrictions thereunder. The aforesaid notification was amended so far as the rates are concerned, vide SO 24 dated 3.10.2012, by which rate at which tax to be deducted at source was increased from 2% to 4% with effect from 1.4.2012. 30. In Annexure 7, Joint Commissioner of Commercial Taxes clarified that the deduction at the rate of 4% of advance VAT at source has to be made from the bills of the works contract but the bills of the works contract in which transfer of property in goods is not involved, deduction of VAT at source is not to be made. The Deputy Commissioner of Commercial Taxes sent Annexure 11 to the 7 th respondent in response to the clarification sought for by the 5 th respondent. In Annexure 11, 5 th respondent clarified that where structural work is included along with ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing transfer of property in goods as well as labour and services. In so far as the contention of the petitioner regarding the earth work, it is to be pointed out that in execution of the said earth work, where transfer of property in goods either as goods or some other form and component of labour and service are involved, what are the prescribed deduction to be made are the questions that are to be decided at the time of assessment by the Assessing Authorities. Merely going by the description of the items of earth work contained in the agreement, it cannot be said that the items contained in Part A of the Contract, earth work is purely earth work involving only labour and services. Re. Contention: Notification not making provision for deduction of labour and service charges 34. In exercise of powers conferred under sub-section (1) of Section 44 of JVAT Act, the State Government issued notification dated 31.3.2006 prescribing rate of tax as 2% at which deduction to be made from the consideration amount of the works contract. The said notification was amended vide SO 24 dated 3.10.2012 by which tax to be deducted at source was increased from 2% to 4% with eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s beyond the legislative competence of the State Legislature so far as deduction of TDS from the payment of the consideration amount pertaining to labour and service charges is concerned. Even though the writ petition was filed way back in 2013, the Interlocutory Application was filed only in the month of April, 2014 and the Interlocutory Application was not earlier pressed and only at the time of final hearing of the writ petition, arguments were sought to be advanced challenging the notification. 37 . Be that as it may, let us consider the merits of the contention of the petitioner. The Notification SO 208 dated 31.3.2006 was issued in exercise of powers conferred by sub-section (1) of Section 44 of the Act. Section 44(1) of the Act stipulates that the State Government may by notification in the official gazette specify TDS to be deducted by the contractee from any valuable consideration paid to the contractors for the execution of works contract in the State. Since the notification was issued in exercise of power under Section 44(1) of the Act, the notification is not be read in isolation but to be read along with the Scheme and other provisions of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontractor to the extent it is relatable to supply of labour and services. 2. Where the amount of charges towards the labour, services, hire charges or all other like charges in any contract are not ascertainable, from the terms and conditions or the accounts furnished in this behalf of the contract, the amount of such charges shall be calculated at the following percentages: - Sl. No. Type of contract Percentage of the total value eligible for deduction 1. (a) Electrical Contracts. (i) H.T. Transmission lines (ii) Sub-station equipment (iii) Power house equipment and extensions (iv) 11 and 22 KV and L.T. distribution lines 12+5 (v) All other electrical contracts (b) All structural contracts Twenty five percent Thirty five percent Twenty percent Fifteen percent Fifteen percent Seventeen percent 2 Installation of plant and machinery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the JVAT Rules, in particular Rules 22 and 23, stipulate various provisions for deductions to be made including labour and service charges and the Notification SO 208 has to be read along with other provisions of the JVAT Act and Rules and not in isolation. The Notification SO 208 dated 31.3.2006 is not derogatory to the provisions of the JVAT Act and the Rules. 41 . We summarize our conclusion as under:- Tax deducted at source is for effective recovery of tax then and there, when the bill amount is paid by the contractee for the works contract for the execution of the works contract. If the contractee is to decide the component of labour and service involved in the works contract, it would lead to practical inconveniences and make the provision unworkable. The object of the deduction of tax at source, which is intended for effective recovery of tax, will thus, be defeated. Various provisions of the JVAT Act and Rules, in particular Rules 22 and 23, stipulate various provisions for deduction to be made including labour and service charges and the Notification SO 208 dated 31.3.2006 has to be read along with other provisions of the JV ..... X X X X Extracts X X X X X X X X Extracts X X X X
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