Jaihind Projects Limited vs State of Madhya Pradesh and Others

A.K. Patnaik, C.J.—The petitioner is executing the work order awarded to it by the GAIL (India) Limited (respondent No. 4) for laying of HDPE duct, blowing and splicing of OFC. The petitioner''s case is that the work relates to technical advice, labour supervision and engineering service and did not essentially involve supply of goods. u/s 35 of the Madhya Pradesh Commercial Tax Act, 1994, deductions at the rate of two per cent of the value of contract were to be made towards tax payable by the contractor in case the works contract exceeds a value of Rs. one lac. Since the contract of the petitioner did not involve essentially supply of goods, the petitioner applied for a certificate for concessional rate of deductions u/s 35 of the Madhya Pradesh Commercial Tax Act, 1994, and respondent No. 3 issued a certificate u/s 35A of the Madhya Pradesh Commercial Tax Act, 1994 to the effect that deductions from the value of contract of the petitioner would be made at concessional rate of 0.5 per cent instead of two per cent. Thereafter, the Madhya Pradesh VAT Act, 2002 came into force with effect from April 1, 2006. Section 26 of the Madhya Pradesh VAT Act, 2002 provided for deductions towards payment of tax in certain cases. Sub-section (2) of Section 26 of the Madhya Pradesh VAT Act, 2002 which is similar to Section 35 of the Madhya Pradesh Commercial Tax Act, 1994 is quoted hereinbelow:

Section 26. Deduction and payment of tax in certain cases.--(1)...

(2) Notwithstanding anything contained in any other provision of this Act, any person letting out a works contract of value exceeding three lac rupees to a contractor involving sale of any goods in the course of execution thereof by the contractor shall before making the payment of any amount towards the value of such contract to him, deduct at the rate of two per cent an amount towards the tax payable by the contractor under this Act.

Section 27 of the Madhya Pradesh VAT Act, 2002, however provided that notwithstanding anything contained in Section 26, no deduction towards tax shall be made from any consideration payable to a dealer or person, if such dealer or person furnishes to the person responsible for paying any amount in respect of the sale or supply of goods a certificate in writing in such form by such authority in such manner as may be prescribed. This provision in Section 27 of the Madhya Pradesh VAT Act, 2002 was similar to Section 35A of the Madhya Pradesh Commercial Tax Act, 1994 under which the prescribed authority could issue a certificate to a dealer or person for deduction of tax at a concessional rate. Accordingly, the petitioner applied for a certificate for deduction of tax at concessional rate u/s 27 of the Madhya Pradesh VAT Act, 2002, and was also granted such certificate on June 2, 2006 to the effect that payment to the petitioner up to Rs. 20 crores could be made by respondent No. 4 without deduction of any amount towards tax under the M.P. VAT Act, 2002. But, subsequently, the certificate granted u/s 27 of the Madhya Pradesh VAT Act, 2002 was cancelled by respondent No. 3 on December 2, 2005 with retrospective effect from the date the certificate was granted because of omission of Section 27 of the Madhya Pradesh VAT Act, 2002, by the Second Amendment Madhya Pradesh VAT Act, 2006 with retrospective effect. After the cancellation of certificate issued u/s 27 of the Madhya Pradesh VAT Act, 2002, respondent No. 4 has been directed by respondent No. 3 to deduct tax on a payment made by the respondent No. 4 to the petitioner under the works contract. The petitioner has, therefore, challenged the provisions of Section 26(2) of the Madhya Pradesh VAT Act, 2002 as ultra vires.

Mr. Sumit Nema, learned Counsel appearing for the petitioner, submitted that Sub-section (2) of Section 26 of the Madhya Pradesh VAT Act, 2002 is identically worded as Section 35 of the Madhya Pradesh Commercial Tax Act, 1994 and the Full Bench of this court in the case of Jaiprakash Associates Ltd. v. State of M. P. [2007] 6 VST 1 (MP) [Writ Petition No. 3593 of 2004 decided on September 28, 2006] has declared that Section 35 of the Madhya Pradesh Commercial Tax Act, 1994 was beyond the competence of the State Legislature and was ultra vires the Constitution following the judgments in Steel Authority of India Ltd. Vs. State of Orissa and Others etc. etc., , M/s. Nathpa Jhakri Jt. Venture Vs. State of Himachal Pradesh and Others, and Rapti Commission Agency Vs. State of U.P. and Others, in which the Supreme Court has taken a view that if a person is not liable for payment of tax at all, at any time, the collection of tax from him, with a possible contingency of refund at a later stage, will not make the original levy valid. He submitted that the Full Bench in Jaiprakash Associates Ltd. [2007] 6 VST 1 (MP) has found that Section 35(1) of the Madhya Pradesh Commercial Tax Act, 1994 did not provide for excluding from the value of works contract, sales made outside the State, sales made in the course of inter-State trade and commerce and sales made in the course of export and import although these transactions were not exigible to tax under the Madhya Pradesh Commercial Tax Act, 1994. He further submitted that Sub-section (2) of Section 26 of the Madhya Pradesh VAT Act, 2002 as also Section 35(1) of the Madhya Pradesh Commercial Tax Act, 1994 did not provide for exclusion of value of labour and services from the value of the contract for the purpose of deduction of sales tax at source and the law is well-settled by the Supreme Court that value of labour and services will have to be excluded from the taxable turnover of goods as they do not involve any transfer of property in goods.

Mr. Sanjay K. Agrawal, learned Deputy Advocate-General appearing for the respondents/State, on the other hand, submitted relying on the return filed on behalf of the respondent Nos. 1 to 3 that Section 26 of the Madhya Pradesh VAT (Amendment) Act, 2007 has brought in a material change so as to make a provision in the proviso to Section 26 of the Madhya Pradesh VAT Act, 2002 that if the value of labour involved in the contract is more than fifty per cent of the contract value and the contractor has not opted for composition u/s 11A the deduction towards the tax payable shall be made at the rate of one per cent and further that no deduction shall be made in respect of any sale or purchase taking place outside the State of Madhya Pradesh or in the course of inter-State trade and commerce and in course of import of goods into the territory of India. He submitted that the deficiencies pointed out by the Full Bench of this court in the case of Jaiprakash Associates Ltd. [2007] 6 VST 1 (MP) in Section 35(1) of the Madhya Pradesh Commercial Tax Act, 1994, have therefore, been removed by the Madhya Pradesh VAT (Amendment) Act, 2007 and Section 26 of the Madhya Pradesh VAT Act, 2002 as amended by the Madhya Pradesh VAT (Amendment) Act, 2007 now cannot be declared to be beyond the competence of the State Legislature and as ultra vires the Constitution.

We have considered the aforesaid submissions of Mr. Sumit Nema and Mr. Sanjay K. Agrawal and we find that Section 26(2) of the Madhya Pradesh VAT Act, 2002 as it stood prior to its amendment by the Madhya Pradesh VAT (Amendment) Act, 2007 is identically worded as Section 35(1) of the Madhya Pradesh Commercial Tax Act, 1994. In other words, Section 26(2) of the Madhya Pradesh VAT Act, 2002 prior to its amendment by the Madhya Pradesh VAT (Amendment) Act, 2007, did not provide for exclusion of value of labour and services. Hence, all deductions made from the bills of the petitioner by respondent No. 4 in accordance with Section 26(2) of the Madhya Pradesh VAT Act, 2002, were made without excluding therefrom the value of labour and services. For the reasons given in the Full Bench judgment of this court in the case of Jaiprakash Associates Ltd. [2007] 6 VST 1 (MP) the deductions u/s 26(2) of the Madhya Pradesh VAT Act, 2002 prior to its amendment by the Madhya Pradesh VAT (Amendment) Act, 2007 were beyond the competence of the State Legislature.

We, therefore, direct that all the deductions made pursuant to Section 26(2) of the Madhya Pradesh VAT Act, 2002 by respondent No. 4 from the bills of the petitioner prior to its amendment by the Madhya Pradesh VAT (Amendment) Act, 2007, i.e., from April 1, 2006 to March 31, 2007 would be refunded to the petitioner. We hasten to clarify that if the petitioner was liable to pay tax along with the return for the period from April 1, 2006 to March 31, 2007 and the petitioner has claimed adjustment of the deductions so made against the tax payable by it along with return, the amount deducted and adjusted towards the tax payable along with the return will not be refunded to the petitioner. We further make it clear that notwithstanding this direction to refund the amount deducted from the bills of the petitioner by respondent No. 4, the petitioner would be liable to tax in case such liability is fixed by the assessment made on the petitioner. We further clarify that the amounts deducted prior to the Madhya Pradesh VAT (Amendment) Act, 2007 from the bills of the petitioner will be refunded by the respondent No. 4 or the department with whosoever the amounts so deducted are available.

With the aforesaid directions, the writ petition is disposed of accordingly.