JUDGMENT
Kumar Rajaratnam, J.
1. Section 19-A of the Karnataka Sales Tax Act (hereinafter referred to as “the Act” as it stood then was struck down as unconstitutional by a division Bench of this Court reported in [1997] 105 STC 192 in the case of KEC International Limited v. State of Karnataka.
2. It has also been brought to our notice that the special leave petition preferred against the division Bench judgment of this Court was dismissed as withdrawn by the Supreme Court dated January 30, 1997.
3. Section 19-A of the Karnataka Sales Tax Act, 1957, which was struck down by this Court, reads as follows :
“Section 19-A : Deduction of tax at source.–(1) Notwithstanding anything contained in this Act, the Central Government, or any State Government, or an industrial, commercial or trading undertaking of the Central Government, or of any State Government (or any such undertaking in joint sector), or a local authority or a statutory body, shall deduct out of the amounts payable by them to a dealer in respect of works contracts of the nature specified in the Sixth Schedule executed for them, an amount calculated,–
(a) at the rate of two per cent of the total amount payable to such dealers, if the works contract executed is as specified under serial number 6 of the Sixth Schedule ; or
(b) at the rate of four per cent of the total amount payable to such dealers, if the works contract executed is other than those specified in serial number 6 of the Sixth Schedule :
Provided that no such deduction shall be made if the amounts payable by them to the dealer is less than rupees one lakh in a year ;”
4. The division Bench of this Court did not strike down Section 19-A on the ground that the State Legislature did not have the power to pass a legislation for collection of advance tax in respect of works contract. It was struck down on the ground that Section 19-A authorises deduction of tax on total amount of works contract without making any provision for deduction of value of certain components of works contract amounts which are not exigible to sales tax at all.
5. Section 19-A was reintroduced by Act No. 7 of 1997 with effect from April 1, 1997. The substituted provisions of Section 19-A as it now stands in the statute to the extent it is relevant for the purpose of the case reads as follows :
“Section 19-A : Deduction of tax at source in case of works contract.–(1) Notwithstanding anything contained in this Act, the Central Government, or any State Government, or an industrial, commercial or trading undertaking of the Central Government or of any State Government, or any such undertaking in joint sector or any other industrial, commercial or trading undertaking as may be notified by the Commissioner from time to time or a local authority or a statutory body, shall deduct out of the amounts payable by them to a dealer in respect of works contracts of the nature specified in the Sixth Schedule executed for them, in the State, an amount calculated,–
(a) in the case of a dealer, who is permitted to pay the amount by way of composition under Sub-section (6) of Section 17, at the rate of four per cent of the total amount payable to such dealer ;
(b) in the case of a dealer other than the dealer referred to in Clause (a), at the rates specified in the Sixth Schedule :
Provided that,–
(i) no such deduction shall be made if the amount payable to a dealer by the authorities mentioned in Sub-section (1), is less than one lakh rupees in a year ; or
Act 4 of 1999 (1-4-1999 to 31-3-2000)
(ii) no such deduction, shall be made in respect of dealers, as may be notified by the Commissioner from time to time ; or
Act 5 of 2000 (from 1-4-2000)
(ii) subject to such conditions and in such circumstances as may be prescribed, the Commissioner may notify on application made by any dealer that no deduction shall be made in respect of such dealer.
(iii) if any works contract for execution for the authorities mentioned in Sub-section (1), involves only labour or service but does not involve transfer of property in goods and it is certified to be so by the assessing authority or by the assessing authority of the area on an application made by any dealer, the provisions of Sub-section (1) shall not apply and every such application shall be disposed of by the assessing authority within one month from the date of receipt, either by issue of a certificate as aforesaid or by endorsement intimating ineligibility to such a certificate to the dealer, as the case may be ;
(iv) in case of a dealer mentioned in Clause (b), in respect of any other works contract which involves partly labour or service and partly transfer of property in goods, the total amount on which tax is calculable under Sub-section (1), shall be the total amount payable to the dealer as reduced by twenty-five per cent thereof as tentatively representing cost of labour or service.
(2) The authority making deduction under Sub-section (1), shall send every month to the prescribed authority a statement in the prescribed form containing particulars of tax deducted during the preceding month and pay full amount of the tax so deducted by it within twenty days after the close of the preceding month in which such deductions were made and the amounts so payable shall for the purposes of Section 13 be deemed to be an amount due under this Act :
Provided that, where default is made in complying with the provisions of this Sub-section, the prescribed authority may, after such enquiry as it deems fit and after giving opportunity to the concerned authority of being heard, determine to the best of its judgment, the amount payable under this Sub-section by such authority and the amount so determined shall be deemed to be an amount due under the Act for the purposes of Section 13.
(2-A) If default is committed in the payment of tax deducted beyond ten days after the expiry of the period specified under Sub-section (2), the authority making deductions under Sub-section (1) shall pay, by way of penalty, a sum equal to the penalty specified under Clause (ii) of Sub-section (2) of Section 13 during the period in which such default is continued.
(3) The authority making deduction under Sub-section (1) shall furnish to the dealer from whom such deduction is made, a certificate obtained from the prescribed authority containing such particulars as may be prescribed.
(4) Payment by way of deduction in accordance with Sub-section (2), shall be without prejudice to any other mode of recovery of tax under this Act from the dealer executing the works contract.
(5) Where tax in respect of the works contract is remitted under Sub-section (2), the tax payable by the dealer for any month, quarter or for the whole year, as the case may be, in respect of such works contract shall be reduced by the amount of tax already remitted under the said Sub-section :
Provided that the burden of proving that the tax on such works contract has already been remitted and of establishing the exact quantum of tax so remitted shall be on the dealer claiming the reduction.”
6. In the re-enacted Section 19-A four concessions were made and for want of a better word we refer to them as concessions. It was submitted by Mr. Anand, learned counsel for the State, that these concessions would take care of the defects pointed out by the division Bench which struck down Section 19-A on a earlier occasion. The four concessions are as follows :
1. Proviso (ii) to Section 19-A(1).–Total exemption from tax deduction in specified situations on certification by the Commissioner.
2. Proviso (iii) to Section 19-A(1).–Total exemption from tax deduction in the case of a contract involving only labour or service but does not involve transfer of property in goods.
3. Proviso (iv) to Section 19-A(1).–In case of a contract involvingpartly labour or service and partly transfer of property in goods, tax deduction at the prescribed rate to be made from gross contract payments as reduced by 25 per cent thereof as tentatively representing cost of labour or service.
4. Section 19-A(1A).–Permits a dealer to pay 4 per cent of the total turnover by way of composition.
7. It will have to be seen whether these “concessions” would satisfy the rationale of the judgment rendered by the division Bench of this Court which struck down Section 19-A on the earlier occasion.
8. The first concession relates to total exemption on a certification by the Commissioner. Rule 13-B empowers the Commissioner to grant exemption on advance tax on certain conditions. One of the conditions is that the dealer whose turnover is less than Rs. 5 crores cannot approach the Commissioner.
9. A person who is a dealer for a period less than three years cannot seek exemption. There is also no specification of the time within which the Commissioner has to exercise his powers under Section 19-A(1)(ii) read with Rule 13-B.
10. In other words dealers whose turnover is less than Rs. 5 crores cannot seek relief. No doubt one of the appellant has secured total exemption from the Commissioner for the years 1999-2000 to 2001-2002. It is believed that apart from the appellant only one other dealer has been given this benefit. However, the exemption conferred by the Commissioner has turned out to be almost illusory because for 1999-2000, the relevant notification was issued on 21st October, 1999, and for 2001-2002 on 14th December, 2001. As the certificate is valid only till the end of the relevant financial year, it is obvious that by the time the certificate was issued, three-fourth of the year was over and till then, the authorities had deducted tax resulting in enormous amount of TDS. Further, when the financial year is coming to an end, many of the contract awarding authorities have no budgetary sanctions left and therefore, do not disburse any amount. The disbursal in such cases will commence on 1st April of the following year and in the absence of a certificate, tax deduction will take place.
11. This concession is no concession at all in the eye of law, since it is confined to dealers whose turnover is more than Rs.5 crores and who should have been in business at least for three years. There is hostile discrimination between one dealer and the other and these certifications are invariably given at the fag end of the assessment year. In any way such discretion is discriminative and does not resolve the legal position between total turnover and taxable turnover.
12. The second concession was with regard to total exemption to a contract involving only labour or service, but does not involve transfer of property in goods. This mechanism in approaching the assessing authority whether works contract does not involve transfer of property in goods is no mechanism at all as labour work is outside the purview of the charging section, namely, Section 5-B of the Act. There is no time-limit fixed for the assessing authority to dispose of the application. In any event works involving labour or service is totally exempted from tax under the charging section.
13. The third concession relates to works contract involving partly labour or service and partly transfer of property in goods. In such cases the TDS is payable on 75 per cent of the total turnover giving a concession of 25 per cent.
14. This does not however answer the charge that even in the 75 per cent of the works contract there is bound to be certain transactions which are not exigible to sales tax such as inter-State trade or commerce or which takes place outside the State or which takes place in the course of import and export.
15. In other words the charging section rightly deals with taxable turnover. The mechanism section deals with total turnover. The concession of 25 per cent given in the mechanism section does not resolve the mandate of law that non-exigible items can be subject to advance tax to be ultimately refunded after adjustments.
16. The other concession given in the re-enacted statute was the right of a dealer for composition. Section 19-A permits a dealer to pay 4 per cent of the total turnover. The system of composition has been upheld by the Supreme Court in Mycon Construction Ltd. case . However the system of composition is voluntary and will not apply for a dealer who does not opt for compounding.
17. These are the four concessions that have been given to a dealer under Section 19-A which was not there in the original section which was struck down by this Court.
18. These concessions may appear to be reasonable at first blush. However on a closer scrutiny the mechanism section undoubtedly includes those items which are not exigible to tax in the charging section. There is bound to be a retention of dealers money paid as advance tax on the gross turnover including those items not exigible to tax till the assessment is concluded in terms of Section 12(6) of the Act. The retention of the money can be as long as three years and can be adjusted or paid to the dealer without interest. Section 13-A of the Act does not provide for any interest from the date of deduction as is the case under the Income-tax Act under Section 244-Aof the Income-tax Act. Retention of money for such a long period on gross turnover some of which is not exigible to tax under the charging section is discriminatory and confiscatory in nature.
19. Section 19-A is the mechanism section and Section 5-B is the charging section. Section 19-A is ancillary to Section 5-B. When the tax liability under Section 5-B is on taxable turnover the deduction of tax at source should also be in terms of the taxable turnover. The dealers are exposed to deduction of tax on gross turnover and there is no mechanism to prevent such excess collection and in that respect Section 19-A overrides the provisions of charging Section 5-B.
20. It is not the concessions that makes a law correct. The only question is whether the State Legislature has power to impose advance tax on those items which are not exigible to tax. The mechanism section must reasonably conform to the charging section on this aspect.
21. The division Bench of this Court in KEC International Limited v. State of Karnataka [1997] 105 STC 192 followed the decision of the Supreme Court in Gannon Dunkerley case to the effect that the State Legislature has no competence to impose tax on the total amount payable under works contract in exercise of its power under entry 54 of List II of the Seventh Schedule to the Constitution read with Article 366(29A). The division Bench further held that though Section 19-A was only incidental and ancillary to the main charging section even the conferment of such ancillary power must be within the competence of the State Legislature. The division Bench did not, however, question the competence of the State Legislature to impose advance tax on works contract to be adjusted later at the time of assessment. The court further held that the ancillary power can be provided or exercised only in aid of the charging section and not in derogation of the same.
22. The division Bench of this Court in Shetty Leasing (India) Ltd. v. Union of India reported in [1996] 100 STC 533 dealt with the difference between total turnover and taxable turnover. The matter under consideration before the division Bench was Section 5-C of the Karnataka Sales Tax Act, 1957 (Act 4 of 1992) which was introduced with retrospective effect. This Court held that the tax levied under Section 5-C of the Karnataka Sales Tax Act, 1957, on the transfer of right to use goods is with reference to the definition of “total turnover” contained in Section 2(u-2) of the Act. “Taxable turnover” in Section 2(u-1) excludes turnover of purchases or sales in the course of inter-State trade or commerce or in the course of export or import of goods outside or inside the territory of India, while “total turnover” is the aggregate of turnover including the transactions whether or not the whole or any portion of turnover is liable to tax or in the course of inter-State trade or commerce or in the course of import or export of goods into the country. The Legislature has made a distinction between turnover of the sale of goods on which tax is not leviable and sale of goods on which tax is leviable. As a result of the use of the words “total turnover” in Section 5-C, the ambit of incidence of tax has been widened so as to include transactions outside the sphere of tax within the competence of the State. Thus Section 5-C transgresses the limits of legislative power in contravention of Article 286(1) of the Constitution inasmuch as it enables tax being imposed on deemed sales that take place in the course of inter-State trade or commerce or in the course of import or export. Since the invalidity of Section 5-C goes to the root of imposition of tax, the court held that Section 5-C has to be declared invalid.
23. The State Legislature cannot pick forbidden fruits in the guise of advance tax from the assessee in the mechanism section which is forbidden in the charging section and claim to refund the amount at the time of final assessment. What is forbidden in the charging section is also forbidden in the mechanism section. The concessions given in the mechanism section, is no concession if the mechanism section in the Act includes items which are not exigible to tax.
24. Section 5-B is the charging section and refers to only taxable turnover and for a tax on taxable turnover for transfer of property in goods involved in the execution of works contracts and such works contract on taxable turnover shall be subject to levy under the Sixth Schedule on a particular rate.
25. The expression “taxable turnover” has been defined in Section 2(u-1). Taxable turnover excludes inter-State, export and import sales. The definition of taxable turnover reads as follows :
“(u-1) ‘Taxable turnover’ means the turnover on which a 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, but shall not include the turnover of purchase or sale in the course of inter-State trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India.”
26. The tax liability with reference to a works contract can arise only on the taxable turnover which will be arrived at after excluding turnover pertaining to inter-State sales, import sales, outside the State sales, exempted goods, tax suffered goods, labour charges and payments to Sub-contractors (all collectively referred to as “exempted turnover”, for short).
27. State’s power to levy sales tax is traceable to entry 54 of List II of the Seventh Schedule to the Constitution. Such power is circumscribed by the limitations contained in Article 286 of the Constitution which are that no tax can be imposed on sale or purchase taking place outside the State or in the course of import into or export out of India or in the course of inter-State trade and commerce. This limitation of State’s taxing power by way of sales tax is in total contrast to the power of the Centre to levy income-tax traceable to entry 82 of List I of the Seventh Schedule which is virtually unfettered. This is settled position of law and suffice to refer to the Supreme Court’s judgments in the cases of Builders’ Association of India v. Union of India reported in [1989] 73 STC 370 and Gannon Dunkerley & Co. v. State of Rajasthan reported in [1993] 88 STC 204.
28. We are concerned not with concessions but with the purity of law as laid down by catena of judgments rendered by courts.
29. Section 19-A as originally enacted provided for tax deduction on the gross amount payable which can be more than even the total turnover. It did not provide any mechanism for confining the quantum of TDS to the tax attributable to the taxable turnover. In other words, it did not provide for exclusion of the exempted turnover.
30. When it was challenged the court relied on the settled position of law and repelled the Revenue’s contention that tax deduction being only a machinery provision, it need not be strictly conform to the charging provision. The court held that even a machinery provision has to strictly conform to the charging provision and cannot permit tax deduction or collection in respect of exempted turnover. Such collection or deduction cannot even be for a short time with the assurance that the excess will be refunded in course of time after assessment. The Revenue preferred an appeal to the Supreme Court against this judgment and significantly, withdrew the same which means that the State on its own accepted the division Bench ruling as laying down the correct law.
31. If the State is not competent to impose tax on certain transaction of sale but is permitted to collect tax on such exempt sale and keep the amount so collected for years without any compensation (interest will be payable only after three months of the date of determination of the refund on assessment which could be anywhere between three and four years) such provision is liable to be invalidated as being confiscatory in nature. It is true that in fiscal matters, the Legislature has a latitude which should not be interfered with by courts, but not so where it relates to the legislative competence. These observations of the Patna High Court rendered in the case reported in Larsen and Toubro Ltd. v. State of Bihar [2000] 117 STC 41 (para 24 on page 54) have become final by reason of the State’s special leave petition having been dismissed vide order dated January 4, 2000 in SLP (Civil) Nos. 18605-18608 of 1999.
32. The ultimate question before the court is whether the State Legislature is competent to make a provision for advance tax on the total amount of contract without leaving out the component of sales or price of other services which are not exigible to tax at all either under the Karnataka Sales Tax Act or under the Central Sales Tax Act.
33. The principles laid down in Gannon Dunkerley’s case is clear and loud. While striking down the provisions of Sub-section (3) of Section 5 of the Rajasthan Sales Tax Act, the Supreme Court pronounced as follows :
“The High Court has upheld the validity of Sub-section (3) of Section 5 by taking into account the provisions of Sub-rule (2) of Rule 29. But, while considering the said provisions the High Court has failed to notice that under Clause (i) of Sub-rule (2) of Rule 29, transfer of property in goods involved in the execution of a works contract, on which no tax is leviable under Section 5, are not required to be deducted from the turnover. The High Court also failed to attach importance to the use of the word ‘turnover’ (instead of words ‘taxable turnover’) in Sub-section (3) of Section 5 as a result of which the amplitude of the incidence of tax has been widened so as to include transactions which are outside the sphere of taxation available to the State Legislature under entry 54 of the State List. We are, therefore, unable to uphold the decision of the High Court in this regard and it must be held that Sub-section (3) of Section 5 transgresses the limits of the legislative power conferred on the State Legislature under entry 54 of the State List inasmuch as it enables tax being imposed on deemed sales resulting from transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract which take place in the course of inter-State trade or commerce, or which take place outside the State or which take place in the course of import and export within the meaning of Sections 3, 4 and 5, respectively of the Central Sales Tax Act and it does not take into account the conditions and restrictions imposed by Section 15 of the Central Sales Tax Act on goods declared to be of special importance in inter-State trade or commerce under Section 14 of the Central Sales Tax Act. Clause (i) of Sub-rule (2) of Rule 29 of the Rajasthan Sales Tax Rules also suffers from the same infirmity. Section 5(3) of the Rajasthan Sales Tax Act and Clause (i) of sub-rule (2) of Rule 29 of the Rajasthan Sales Tax Rules must, therefore, be held to be unconstitutional and void.”
34. Therefore, when a mechanism is introduced for advance tax at source the mechanism must ensure that the principles laid down in the Gannon Dunkerley case be strictly followed. Mere concessions here and there will not give the power of the Legislature to include items which are not exigible to tax under law.
35. All the three appellants before the court are works contractors attracting tax under entry 6 of the Sixth Schedule to the Karnataka Sales Tax Act, 1957.
36. Mr. Kumar, learned Senior Counsel for the appellants, has produced some materials with respect to contracts entered into by the first appellant with the authority. From the materials it was shown that if the contract value is Rs. 100 various exemption permitted under Section 5-B would be Rs. 60 resulting in a taxable turnover of approximately Rs. 40 and if taxable turnover is calculated at 12 per cent under Section 5-B the tax will be Rs. 4.80 paise. On the same transaction TDS under Section 19-A will be 75 per cent of the contract value and if TDS is calculated at 9 per cent of Rs. 100 (since only 75 per cent of the total turnover is deducted as TDS which comes to 9 per cent) the TDS under Section 19-A will come to Rs. 9 while it would be only Rs. 4.80 under charging section. This illustration shows that TDS includes transactions which are not exigible to tax in the charging section. This approximate calculation is just an illustration to show that there is no rational in giving such concessions and that the TDS under Section 19-A includes large number of transactions which are not exigible to tax under the charging section, viz., under Section 5-B of the Act. These figures no doubt are approximate but it indicates that in most cases the taxable turnover would be far less than the total turnover. What we are concerned is that there should be an approximate nexus between TDS and the charging section and the scope of TDS cannot be widened and forbidden fruits cannot be the subject-matter of TDS. The learned single Judge took the view that the machinery provided in the Act cannot to the last farthing be calculated, it is only an interim stage of deduction at source and that the concessions given in the re-enacted Section 19-A are reasonable and dismissed the writ petition which is under challenge in the writ appeals.
37. In B. Seenaiah & Co. v. Deputy Commissioner of Commercial Taxes (Assts.), Dharwad case reported in [1998] 110 STC 290 (Kar) the learned single Judge held as follows :
“In the present case also, the deduction at source is made on a presumptive basis only though the method prescribed for such deduction is different. Here instead of the assessee depositing money at the prescribed rate for the purchase of goods of the prescribed nature, it is the authority making the payment to the dealer who is supposed to deduct tax at the prescribed rate after giving a deduction prescribed tentatively towards the cost of labour or services. The deduction at 25 per cent apart from being tentative can also not be termed arbitrary having regard to the fact that the rules made under the Act provide for a deduction ranging from 20 to 30 per cent in the case of ‘works contracts’ depending upon their nature in cases where the books of accounts maintained by the dealer are not acceptable, So also it was not necessary that even for the purposes of deductions at source based on a tentative assumption of the taxable turnover, the Legislature ought to have provided for a machinery that was perfect in all respects. Insistence upon the law providing for a machinery which could work out the tax liability or the admissible deductions correct to the last penny amounts to insisting upon making a final assessment at every stage in the execution of a contract which I am afraid is neither warranted nor necessary.”
38. Mr. Anand, learned counsel for the Revenue submitted that first appellant has no locus standi to prefer the writ petition, since he has secured total exemption from the Commissioner for the years 1999-2000 to 2001-2002. Such a submission is attractive. But on a closer scrutiny the exemption granted by the Commissioner was almost illusory since the exemption for 1999-2000 the notification was issued at the end of October, 1999 and for 2001-2002 towards the middle of 2001. The certification is valid only till the end of financial year. It is clear that by the time the certificate was issued most part of the assessment year was over and for most of the transactions notwithstanding the exemption, the tax is deducted at source. Therefore, this exemption is no exemption, since it discriminates from one dealer to another and is violative of Article 14 [see Larsen & Toubro Ltd. v. Commissioner of Sales Tax ].
39. We may usefully refer to three judgments which has some bearing on this case. These judgments were rendered by the respective High Courts much after the judgment of the learned single Judge which is before us in appeal.
40. In the case of Larsen and Toubro Ltd. v. State of Bihar reported in [2000] 117 STC 41 (Patna) the court held that even though adjustment was possible at the time of assessment it is not permissible for the State Legislature to impose tax which is not exigible to tax. The court further held that a provision intended to collect tax in advance can be sustained only when the State is competent to impose tax. The machinery provision has an inevitable nexus with the charging provision. If the charging provision cannot be sustained, the machinery provision also cannot be sustained. If the State does not have power to impose tax on the sale of goods which does not fall within the realm of its legislative competence, any provision regarding recovery of such tax on such sale of goods cannot be within the legislative power and has to be declared ultra vires. The same view was taken by the Patna High Court in (National Building Construction Corporation Limited v. State of Bihar).
41. The judgment rendered by the Patna High Court in Larsen and Toubro Ltd. v. State of Bihar [2000] 117 STC 41 became final when the special leave petition filed by the State in SLP (Civil) Nos. 18605 to 18608 of 1999 was dismissed on January 4, 2000.
42. The Gujarat High Court in the case of Larsen and Toubro Ltd. v. Commissioner of Sales Tax, Gujarat relying on the judgment of the Supreme Court in Steel Authority of India Ltd. v. State of Orissa held that provision requiring deduction of advance tax from all payments to contractors in the absence of certificate from the Commissioner that no tax is deductible was ultra vires, since such a provision did not take into account the fact that the State Legislature has no power to impose tax on inter-State sales or sales in the course of import or outside sales.
43. As stated earlier all these judgments clearly indicate that any provision intended to collect advance tax can be sustained only if the State is competent to impose tax on such items.
44. The Supreme Court in Steel Authority of India Ltd. v. State of Orissa had occasion to deal with a similar situation though not identical. The matter related to the constitutional validity of Section 13-AA of the Orissa Sales Tax Act. Section 13-AA as it originally stood was struck down by the High Court of Orissa in Brajendra Mishra v. State of Orissa [1994] 92 STC 17. The High Court struck down the original Section 13-AA since it did not provide any mechanism to exclude a transaction from its purview even if, ultimately, the transaction was not at all liable to the levy of sales tax.
45. The decision of the High Court of Orissa was accepted and Section 13-AA was replaced on October 4, 1993 with certain modifications. The re-enacted Section 13-AA was challenged before the Supreme Court. It was contended by the State that the re-enacted Section 13-AA of the Orissa Sales Tax Act took into account the earlier decision and that the re-enacted statute was limited to sale or purchase of goods in Orissa. It was also contended by the State that the deduction under the re-enacted statute was 4 per cent of the amount credited or paid by the owner to the contractor, whereas the sales tax liability of the contractor thereon was 8 per cent. It was further 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.
46. The Supreme Court pronounced that no such assumption based on the rate of tax at any given point of time can be made. The re-enacted 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 has been struck down by the Orissa High Court. The previous section was struck down since it was couched in terms wider than what it was permissible to the State Legislature.
47. In the course of the judgment the Supreme Court placed reliance on Bhawani Cotton Mills Ltd. v. State of Punjab . In Bhawani Cotton Mills Ltd.’s case , the Supreme Court pronounced as follows :
“If a person is not liable for payment of tax at all, at any time, the collection of a tax from him, with a possible contingency of refund at a later stage, will not make the original levy valid; because, if particular sales or purchases are exempt from taxation altogether, they can never be taken into account, at any stage, for the purpose of calculating or arriving at the taxable turnover and for levying tax.” (Emphasis supplied by the Court)
48. Ultimately the Supreme Court pronounced as follows :
“13. There can be no doubt, upon a plain interpretation of Section 13-AA, that it is enacted for the purposes of deduction at source of the State sales tax that is payable by a contractor on the value of a works contract. For the purposes of the deduction neither the owner nor the Commissioner who issues to the contractor a certificate under Section 13-AA(5) is entitled to take into account the fact that the works contract involves transfer of property in goods consequent upon of an inter-State sale, an outside sale or a sale in the course of import. The owner is required by Section 13-AA(1) to deposit towards the contractor’s liability to State sales tax four per cent of such amount as he credits or pays to the contractor, regardless of the fact that the value of the works contract includes the value of inter-State sales, outside sales or sales in the course of import. There is, in our view, therefore, no doubt that the provisions of Section 13-AA are beyond the powers of the State Legislature for the State Legislature may make no law levying sales tax on inter-State sales, outside sales or sales in the course of import.” (Emphasis supplied by the court).
49. Accordingly Section 13-AA of the Orissa Sales Tax Act, as amended was struck down as being beyond the purview of the State Legislature.
50. The Supreme Court in Nathpa Jhakri Jt, Venture v. State of Himachal Pradesh reported in [2000] 118 STC 306 following the judgment of Steel Authority of India Limited struck down the Section 12-A of the Himachal Pradesh General Sales Tax Act, 1968. The said provision provided for deduction of an amount from the bills or invoices of the works contractors purporting to be tax payable towards transfer of goods involved in works contract. The High Court took the view that the relevant amount is the valuable consideration payable for the transfer of property in goods and not the entire value or consideration for the entire works contract and what was directed to be deducted is only an amount not exceeding 4 per cent as may be prescribed purporting to be a part or whole of the tax payable on such sales which would necessarily mean tax payable under the charging provisions of the Act. The High Court upheld the validity of section on the ground that “all the payments being made in respect of all works contract executed” means and refers only to the payments on account of valuable consideration payable for the transfer of property in goods, and not other payments. The High Court further noticed that the rule also does not enable any person to deduct any amount other than what is contemplated by the section and, therefore, it does not suffer from any invalidity.
51. The Supreme Court did not accept the reasoning of the High Court and held as follows :
“4. A bare perusal of the two provisions will make it clear that in either provision there is an obligation to deduct from transactions relating to works contract on bills or invoices raised by the works contractor an amount not exceeding 4 per cent or 2 per cent, as the case may be. Though the object of the provision is to meet the tax in respect of the transactions on all works contract on the valuable consideration payable for the transfer of property in goods involved in the execution of the works contract, the effect of the provision is that, irrespective of whether the sales are inter-State sales or outside sales or export sales which are outside the purview of the State Act and those transactions in respect of which no tax can be levied even in terms of the enactment itself, such deductions have to be made in the bills or invoices of the contractors. To say that if a person is not liable for payment of tax inasmuch as on completion of the assessment refund can be obtained at a later stage is no solace, as noticed in Bhawani Cotton Mills Ltd. v. State of Punjab . Further, there is no provision for certification of the extent of the deduction that can be made by the authority. Therefore, we must hold that arbitrary and uncanalised powers have been conferred on the concerned person to deduct up to 4 per cent from the sum payable to the works contractor irrespective whether ultimately the transaction is liable for payment to any sales tax at all. In that view of the matter, we have no hesitation in rejecting the contention advanced on behalf of the State.
5. The learned counsel drew our attention to the decision in a case arising under the Bihar Sales Tax Act and the earlier decision under the Orissa Sales Tax Act, but in view of the decision of this Court in Steel Authority of India [2000] 118 STC 297 ; (2000) 2 SCALE 98, it is wholly unnecessary to refer to the same. Following the decision in Steel Authority of India case , we allow this appeal and set aside the order made by the High Court by allowing the writ petition and quashing the aforesaid provisions as being beyond the purview of the Himachal Pradesh State Legislature. Such amount as has been collected from the appellant under the provisions of Section 12-A read with Rule 31-A shall forthwith be refunded by the State. If any amount has been deposited in any bank pursuant to orders passed by this Court or the High Court, it shall be refunded to the appellant with interest accruing thereon. In the circumstances of the case, there shall be no order as to costs.”
52. There are other pronouncements of the court which are to the effect that though the provision for TDS enacted by the State Legislature is constitutionally valid such TDS cannot exceed the brief of the charging section and consequently the TDS cannot include those transactions which are not exigible to tax. The State Legislature can make no law levying sales tax on inter-State sales, outside sales or sales in the course of import.
53. The Steel Authority of India Limited’s case was pronounced by the Supreme Court after the judgment rendered by the learned single Judge which is impugned in this case.
54. The learned single Judge did not have the advantage which we had in reading the case of Steel Authority of India Limited .
55. Following the judgment of the Supreme Court in Steel Authority of India Limited v. State of Orissa and for the reasons stated therein we have no alternative except to strike down Section 19-A of the Karnataka Sales Tax Act as it presently stands, since the section ought to have been precisely drafted to make it clear that no advance tax was levied on that part of the amount credited or paid related to inter-State sales, outside sales or sales in the course or import.
56. Accordingly, writ appeals are allowed and the judgment under appeals are set aside and Section 19-A of the Karnataka Sales Tax Act as it presently stands is struck down as being beyond the purview of the State Legislature.
57. It is made clear that any advance tax collected and paid to the Sales Tax Department under Section 19-A shall be adjusted in the future assessments of the assessee.