http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 9  

PETITIONER: STEEL AUTHORITY OF INDIA LTD.

       Vs.

RESPONDENT: STATE OFORISSA & ORS.  ETC.  ETC.

DATE OF JUDGMENT:       25/02/2000

BENCH: Bharucha, J.

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 -

     0) 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  (I 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 two pcrcentum of such sum in respect of the  works contra...!:  :

     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  (  I ), the deducting authority shall  grant  a certificate  to  the contractor in the form  prescribed  and shall  send  a copy thereof to the Spies Tax Officer  within whose jurisdiction the woiks contract is executed.

     (3)  The  amount deducted from the Bills  or  Invoices shall  be deposited into the Government Treasury within  one

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 9  

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  conuractor to the extent of  the  amount 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 28^ April.  1993 in the case of  Braiendra  Mishra vs.  State of0rissa& 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  arbitral,  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  atall 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 9  

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 4^ 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 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’ s’.n.D  be adjusted  by  the  Sales Tax Oilkor towards  the  SaJes  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  ilcard,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 9  

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 cetificate.

     (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  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 aha, 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 Rs.  317 Crores  Orissa by way of CST Sales.  Central Sales Tax  paid in Non-Orissa States.  Both under Section a) and 6(2) of the CST.

     (b)  Supply of equipments from other countries Rs.  16 Crores  outside India on High Seas Sales basis under Section 5 of the CST Act

     (c) Supply of Steel by SAIL Rs.  I8 Crores (d) Design. Engineering   and   other  sendees   Rs.   103  Crores   (e) Fabrication,   erection,   structural.    Rs.   78   Crores" construction, civil construction, etc.

     Under  tho  terms  of   Section  13AA.   as  presently ’cnacted  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  tile  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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 9  

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 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 Dunkerlev and Co. &  Ors.   vs.  State of Rajasthan & Ors., (1993) I 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  dctctmincd after  making  these exclusions from the value of the  works contract.   With this bad-ground, we turn to analyse Section 13AA  as it presently stands.  By reason of sub-section  (1)

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 9  

thereof,  the  person responsible for paying any sum to  any contactor 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 vfsuch 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 sendee  or involves only labour or sendee and.  accordingly, justifies  deduction of tax on a part of the sum in  respect ofthe  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 sendee.  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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 9  

.........."  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  & Am-.,  (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  good^ 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 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 valuer 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  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  tact  that  the appellant  owner  is aggrieved and damnified by the  penalty that  lias  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 tile 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

     outside sales or sales in the course of import.  There

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 9  

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  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 damni^ed by  the  penalty that  lias  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 Opssa 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 asid^.  Section 13AA of the Orissa Sales  Tax Act, as amended with effect from 4^ 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.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 9