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PETITIONER: STEEL AUTHORITY OF INDIA LTD.

       Vs.

RESPONDENT: STATE OF ORISSA & ORS.  ETC.  ETC.

DATE OF JUDGMENT:       25/02/2000

BENCH: S.P.Bharucha, S.N.Phukan, Ruma Pal

JUDGMENT:

     BHARUCHA, J.

     Before  it  was  held to be unconstitutional  on  28th April,  1993, Section 13AA of the Orissa Sales Tax Act  read thus  :   13-AA  :   Deduction of tax at  source  from  the payment to works contractor

     (1)  Notwithstanding anything contained in Section  13 or  any  other law or contract to the contrary,  any  person responsible  for  paying  any  sum  to  any  contractor  for carrying  out any works contract in pursuance of a  contract between  the contractor and  (a) Central Government or  any State  Government,  or (b) any local authority, or  (c)  any authority  or Corporation established by or under a statute, or  (d)  any Company incorporated under the  Companies  Act, 1956  (1 of 1956) including any State or Central  Government undertaking,  or  (e) any Co-operative Society or any  other Association registered under the Societies Registration Act, 1860, (21 of 1860)

     shall at the time of credit of such sum to the account of  the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or any oter mode, whichever is  earlier, deduct an amount towards sales tax equal to two percentum of such sum in respect of the works contract :

     Provided  that if the value of the works contract does not exceed rupee one lakh, no such deduction shall be made.

     (2)   While  making  deduction  as  referred   to   in sub-section  (1),  the  deducting authority  shall  grant  a certificate  to  the contractor in the form  prescribed  and shall  send  a copy thereof to the Sales Tax Officer  within whose jurisdiction the works contract is executed.

     (3)  The  amount deducted from the Bills  or  Invoices shall  be deposited into the Government Treasury within  one week  from the date of deduction in such form or challan  as may be prescribed.

     (4)  Such deposit into the Treasury shall be  adjusted by  the Sales Tax Officer towards the sales tax liability of the  Works  contractor and would also constitute a good  and sufficient  discharge  of  the liability  of  the  deducting authority  to  the  contractor to the extent of  the  amount

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deposited.

     (5)  If  any  person  contravenes  the  provisions  of sub-section  (1)  or sub-section (2) or sub-section  (3)  of this  Section, the Sales Tax Officer shall, after giving him an  opportunity  of  being heard, by an  order  in  writing, impose on such person penalty not exceeding twice the amount required to be deducted and deposited by him into Government Treasury.

     Section  13AA, as it was then read, was struck down by the  High Court of Orissa on 28th April, 1993 in the case of Brajendra  Mishra vs.  State of Orissa & Ors., [1994] 92 STC 17.   The High Court held that Section 13AA 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.  In other words, even in the case of  a pure  and  simple labour contract or service contract  where the question of sale would not arise, the person responsible for  making any payment to a contractor had no option but to deduct two per cent of such sum towards sales tax.  Though a transaction which might not be a sale at all was made liable for  levy  of sales tax, yet in respect of that  transaction power  had been conferred to make deduction of two per  cent from  the  amount  to  be  paid.   In  the  absence  of  any discretion  with  the  authority and in the absence  of  any mechanism  by  which  the   contractor  could  approach  any authority  and  obtain a certificate to the effect that  the transaction  did not amount to a sale, the deduction of  two per cent from the amount could not but be held to be grossly discriminatory  and  confiscatory in nature and,  therefore, the  same had to be struck down.  The High Court added  that by conferring arbitrary, unbridled and uncanalised powers on the  person  concerned to deduct two per cent from  the  sum payable  to  the  contractor, irrespective of  the  question whether,  ultimately, the transaction was liable for payment of  any sales tax at all, could not be held to be a levy  of tax  under any valid legal provision.  It was true that  the deduction  of  two  per cent under Section 13AA  was  to  be ultimately  adjusted  where the transaction in question  was liable  for levy of sales tax, but where the transaction was not  at all liable for levy of sales tax, there the question of  adjustment would not arise and, therefore, the deduction would  be confiscatory in character and effect and it  could not  be held to be a valid provision within the  legislative competence   of  the  legislature   imposing  the  tax   and authorising  the  collection  thereof.  A  bare  reading  of Section  13AA made it explicitly clear that the amplitude of the  incidence  of  tax had been widened so  as  to  include transactions  which  were  outside the  sphere  of  taxation available to the State legislature under Entry 54 of List II of  the  Seventh Schedule to the Constitution.  Inasmuch  as even  in  respect  of a purely labour  contract  or  service charges,  Section 13AA authorised deduction of two per  cent from  the bills of the contractor, it could not but be  held to  be unconstitutional and void.  The decision of the  High Court  was  accepted  and Section 13AA was replaced  on  4th October,  1993  in the following terms, which are now  under challenge.   13-AA  :  Deduction of tax at source from  the payment to works contractors

     (1)  Notwithstanding anything contained in Section  13 or  any  other law or contract to the contrary,  any  person responsible   for   paying  any   sum  to   any   contractor (hereinafter  referred to in this section as the  deducting

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authority)  for  carrying  out  any  works  contract  which involves  transfer  of property in goods, in pursuance of  a contract between the contractor and

     (a) Central Government or any State Government, or (b) any  local  authority, or (c) any authority  or  Corporation established  by  or  under  a statute, or  (d)  any  Company incorporated  under  the  Companies Act, 1956  (1  of  1956) including  any  State or Central Government undertaking,  or (e)  any  Co-operative  Society  or  any  other  Association registered under the Societies Registration Act, 1860 (21 of 1860).

     shall,  at  the  time  of credit of such  sum  to  the account  of the contractor or at the time of payment thereof in  cash or by issue of a cheque or draft or any other mode, whichever  is  earlier, deduct an amount towards  sales  tax equal  to  (four  percentum) of such sum in respect  of  the works-  contract, if the value of the works contract exceeds rupee one lakh.

     (2)   While  making  deduction  as  referred   to   in sub-section  (1),  the  deducting authority  shall  grant  a certificate  to  the contractor in the form  prescribed  and shall  send  a copy thereof to the Sales Tax Officer  within whose jurisdiction the works-contract is executed.

     (3)  The  amount deducted from the Bills  or  Invoices shall  be  deposited into a Government Treasury  within  one week  from the date of deduction in such form or challan  as may be prescribed.

     (4)  Such  deposit into Government Treasury  shall  be adjusted  by  the  Sales Tax Officer towards the  Sales  Tax liability of the contractor and would also constitute a good and  sufficient discharge of the liability of the  deducting authority  to  the  contractor to the extent of  the  amount deposited.

     (5)(a)  Where,  on  an application being made  by  the contractor  in  this behalf, the Commissioner  is  satisfied that  any  works  contract  of the  nature  referred  to  in sub-section  (1) involves both transfer of property in goods and  labour  or service or involves only labour  or  service and,  accordingly,  justifies deduction of tax on a part  of the sum in respect of the works-contract or, as the case may be,  justifies  no deduction of tax, he shall, after  giving the  contractor  a  reasonable opportunity of  being  heard, grant  him  such certificate as may be appropriate,  in  the manner prescribed :

     Provided  that  nothing in the said certificate  shall affect  the  assessment  of the sales tax liability  of  the contractor under this Act.

     (b)  Where  such  a  certificate   is  produced  by  a contractor  before  the  deducting   authority,  until  such certificate  is cancelled by the Commissioner, the deducting authority  shall either make no deduction of tax or make the deduction  of tax as the case may be, in accordance with the said certificate.

     (6)  If  any  person  contravenes  the  provisions  of sub-section  (1)  or  (2) or (3) or of clause  (b)  of  sub- section  (5), the Sales Tax Officer shall, after giving  him

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an opportunity of being heard, by an order in writing impose on  such  person  penalty  not exceeding  twice  the  amount required to be deducted and deposited by him into government treasury.

     The  appellant  has a steel plant at Rourkela  in  the State  of  Orissa.  A vast modernisation programme has  been implemented there.  The appellant has entered into contracts with  parties  in  India  and  abroad  for  the  design  and engineering  of plant and equipment and for the  manufacture of  plant, equipment, components, machinery and spares which will  be  incorporated into the contracts for  erecting  the modernised system and plant.  In other words, it has entered into,  inter  alia,  works  contracts.  One  of  such  works contractors  was  M/s  Mukund  Iron  and  Steel  Works  Ltd. (hereinafter called the Mukund).  The contract between the appellant  and  Mukund  was  for  the  design,  engineering, manufacture, supply, transportation, erection, installation, testing  and commissioning of a basic oxygen furnace  plant. The  value  thereof was Rs.  532 crores.  According  to  the appellant,  the break-up thereof is as follows:  (a) Supply of  equipments  from  States outside Orissa by  way  of  CST Sales.   Central Sales Tax paid in Non-Orissa States.   Both under Section 3(a) and 6(2) of the CST.

     Rs.   317  Crores (b) Supply of equipments from  other countries  outside  India  on High Seas  Sales  basis  under Section 5 of the CST Act

     Rs.  16 Crores (c) Supply of Steel by SAIL

     Rs.   18  Crores  (d)  Design  Engineering  and  other services Rs.  103 Crores

     (e)  Fabrication, erection, structural,  construction, civil construction, etc.  Rs.  78 Crores

     Under the terms of Section 13AA, as presently enacted, the  appellant  deducted sales tax at source at the rate  of four per cent in respect of payments to Mukund pertaining to (d)  and  (e)  above.  It did not deduct tax  at  source  in respect  of  payments under items (a), (b) and (c)  for  the reason  that  they  were in respect  of  inter-State  sales, outside  sales and import sales and, therefore, outside  the purview  of  the Orissa Sales Tax Act.  The  Commercial  Tax Officer,  Rourkela,  did  not  accept   this  stand  of  the appellant and issued to it notices to show cause why penalty proceedings  should  not  be  initiated in  respect  of  the Assessment  Years  1994-95  and 1995-96.  The  notices  were challenged  by the appellant by a writ petition filed in the High  Court of Orissa.  At an interim stage, the authorities were permitted to proceed with the hearing on the show cause notices  but the final order thereon was made subject to the result  of  the writ petition.  Thereafter, the  High  Court ordered  that no coercive steps for recovery should be taken against  the appellant.  Pursuant to the show cause notices, the  Sales Tax Officer imposed penalties upon the  appellant for  the Assessment Years 1994-95 and 1995-96 on the  ground that the appellant should have deducted four per cent of the totality  of its payments to Mukund.  The penalties, in  the sum  of  Rs.  26.98 crores imposed by the order  dated  11th November, 1997 for the Assessment Years 1994-95 and 1995-96, were  challenged by the appellant in a fresh writ  petition. On  the  earlier writ petition the order under challenge  in the  appeal  was passed.  It held that Section 13AA was  not

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ultra  vires the Constitution.  On the second writ  petition an  order  of  deposit of fifty per cent of the  demand  was made,  and  that order is separately challenged.   Upon  the petition  for leave to appeal to this Court, recovery of tax and  penalty was stayed pending the disposal of the  appeal. By  virtue  of Entry 54 of List II of the  Seventh  Schedule read  with  Article  246 of the Constitution of  India,  the States  are empowered to levy taxes on the sale or  purchase of goods, other than newspapers.  The Forty- sixth Amendment to  the Constitution introduced, inter alia, clause (29A)(b) in Article 366 of the Constitution;  as a result, tax on the purchase or sale of goods included 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.   Article 286(1)  of  the Constitution states that no law of  a  State shall  impose, or authorise the imposition of, a tax on  the sale  or purchase of goods where such sale or purchase takes place  outside  the State or in the course of the import  of goods  into,  or  export of goods out of  the  territory  of India.   Article  286(2)  authorises Parliament  by  law  to formulate principles for determining when a sale or purchase of  goods  takes  place  in any of  the  ways  mentioned  in sub-Article (1).  Acting upon this power, Parliament has set out  in  Sections 3, 4 and 5 of the Central Sales  Tax  Act, 1956  principles for determining when a sale or purchase  of goods can be said to take place in the course of inter-State trade  or commerce, when a sale or purchase of goods can  be said  to  take  place outside the State and when a  sale  or purchase of goods can be said to take place in the course of import  or export.  In M/s Gannon Dunkerley and Co.  &  Ors. vs.  State of Rajasthan & Ors., (1993) 1 SCC 364, this Court has held that it is necessary to exclude from the value of a works contract the value of goods which are not taxable by a State  in  view of Sections 3, 4 and 5 of the Central  Sales Tax Act, 1956.  The value of goods involved in the execution of  a works contract has to be determined after making these exclusions  from the value of the works contract.  With this background,  we turn to analyse Section 13AA as it presently stands.   By  reason of sub-section (1) thereof, the  person responsible  for  paying  any  sum  to  any  contractor  for carrying  out any works contract which involves the transfer of  property in goods (now, for convenience, referred to  as the  owner) is obliged to deduct, at the time of credit of that sum to the account of the contractor or payment thereof to  him, an amount towards sales tax equal to four per cent of  such sum in respect of the works contract, provided the value  of  the works contract exceeds rupees one lakh.   The deduction,  therefore,  is  towards the sales  tax  that  is payable  to  the State upon the works contract and it is  of four   per  cent  of  the   value  of  the  works  contract. Sub-section  (2)  requires  the  owner   to  grant  to   the contractor  a certificate in respect of such deduction.   By reason  of  sub-section (3), the amount that the  owner  has deducted  must  be  deposited  by him  into  the  Government treasury  within a week of the deduction.  By reason of sub- section  (4), such deposit is required to be adjusted by the Sales  Tax  Officer towards the sales tax liability  of  the contractor  and it constitutes good and sufficient discharge of  the  liability  of the owner to the  contractor  to  the extent  of the amount deposited.  Sub-section (5)(a) permits the contractor to make an application to the Commissioner of Sales  Tax and if the Commissioner is satisfied thereon that any  works  contract involves both transfer of property  in goods  and  labour  or service or involves  only  labour  or service  and,  accordingly, justifies deduction of tax on  a

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part  of the sum in respect of the works contract or, as the case  may  be justifies no deduction of tax, he shall,  . grant  him  such  certificate as may be appropriate  in  the manner prescribed. To the extent of the amount mentioned in the  certificate  the owner must, by reason  of  sub-section 5(b),  make  no  deduction  of  tax.   The  Commissioner  is required  only  to see whether the works  contract  involves transfer  of property in goods and labour or service or only labour  or service.  If it involves only labour or  service, he  must certify that no deduction of tax shall be made  and if it involves both transfer of property in goods and labour or  service, he shall certify the deduction of a part of the sum  payable  by the owner to the  contractor.   Sub-section 5(a)  takes  no  account of the fact that even  if  a  works contract  involves  both transfer of property in  goods  and labour  or service, State sales tax may not be payable  upon the  entire value ascribable to the transfer of property  in goods for the reason that it is in the course of inter-State sales,  outside sales or sales in the course of export;  nor is such account taken elsewhere in Section 13AA.

     The  form  of the certificate which is referred to  in sub-section(5)  of Section 13AA is to be found in Form  XI-C of  the Orissa Sales Tax Rules.  Part I thereof is the  form for  the application for the grant of a certificate and Part II  is  the form of the certificate itself.  Both the  forms make  it clear that all that the Commissioner is required to look  at is whether any labour or service is involved in the works  contract.   Under sub-section(6) of Section 13AA,  an owner  who  acts contrary to the provisions of  sub-sections (1),  (2), (3) and (5)(b) thereof is liable to penalty  not exceeding  twice  the  amount required to  be  deducted  and deposited  .. The owner, therefore, should he contravene sub-section  (1), would be liable to a penalty not exceeding twice  the  amount that he should have deducted  under  that sub-section.   In  Bhawani Cotton Mills Ltd.  vs.  State  of Punjab  &  Anr., (1967) 3 SCR 577, this Court said, - If  a person is not liable for payment of tax at all, at any time, the  collection of a tax from him, with possible contingency of  refund at a later stage, will not make the original levy valid;   because, if particular sales or purchase 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.

     There  can be no doubt, upon a plain interpretation of Section  13AA,  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 13AA(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  13AA(1)  to  deposit   towards   the contractors  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 13AA 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.   It

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was  contended on behalf of the State that the appellant, as owner,  had  no locus to challenge the validity  of  Section 13AA.   It was contended that the moneys that were  deducted were  moneys that belonged to the contractor and it was only the  contractor who could successfully lay such a challenge. The  contention ignores the fact that the appellant owner is aggrieved and damnified by the penalty that has been imposed upon   it  under  sub-section   (5)  for  contravention   of sub-section  (1)  of Section 13AA.  It has,  therefore,  the standing  to  contest the validity of Section 13AA.  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 13AA.   It was  also contended that the deduction that was required  to be  made  under Section 13AA(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 13AA  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  13AA had been struck down by  the  Orissa High Court for the reason that it was couched in terms wider than  were  permissible  to the State legislature  and  that judgment was accepted.

     In  the result, the appeal is allowed and the judgment and  order  under appeal is set aside.  Section 13AA of  the Orissa  Sales  Tax  Act,  as amended with  effect  from  4th October, 1993, is struck down as being beyond the purview of the  Orissa  State  Legislature.  Such amount  as  has  been collected from the appellant under the provisions of Section 13AA  shall forthwith be refunded by the State.  There shall be  no  order as to costs.  Civil Appeal Nos.   1748-1749  & 2606  of  1998 :  Following the judgment just  delivered  in C.A.   No.   1750 of 1998, the appeals are allowed  and  the orders  under appeal are set aside.  Such amount as has been collected from the appellant under the provisions of Section 13AA  shall forthwith be refunded by the State.  No order as to costs.