Notices denying of Transition of Credit in respect of VAT TDS quashed by Madras High Court

IN THE HIGH COURT OF JUDICATURE AT MADRAS

The Relevant Text of the Order as follows :

7. Heard learned counsels. When a contract is awarded upon rendition of service, the contractee/payee/assessee/ petitioner is paid the contract value less tax deducted at source at 2% of the contract value. The amount, once deducted, is deposited by the depositor/contractor/payer to the account of the petitioner in the Government exchequer and gets auto populated in the contractor’s return at Serial No.9 (iv). The heading of Serial No.9(iv) in the return is ‘tax deduction at source credit’. A monthly return is filed by the petitioner taking into account the entirety of the turnover of the petitioner including the turnover from works contract. Then, at column 8 after computing the tax due on the entire turnover earned, and granting credit for the tax deducted and available for set off, the balance tax payable is reflected. If the tax deducted at source is in excess of what is payable, then, by way of an auto populated entry (an automated entry), the excess is reflected as a refund and a Refund Adjustment Order (RAO) is issued. The RAO will be processed upon a specific request for refund to be paid over in cash. Tran -1 which is a form prescribed for seeking transition of ITC permits the transition of ‘tax credit and entry tax’.

8. The issue that arises in these matters is a determination of the nature of the amount deducted. In SAIL V. State of Orissa (supra) three Judges of the Supreme Court found the provisions of Section 13-AA of the Orissa Sales Tax Act,1947, to be beyond the powers of the State Legislature and thus ultra vires. At paragraph 15, the Bench states as follows:

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.

9. In Nathpa Jhakri Joint Venture (supra), the appellant questioned the validity of Section 12 A of the Himachal Pradesh General Sales Tax Act, 1968 and connected Rules, that provided for a deduction of an amount from the bills or invoices of works contractors. The provision had been upheld by the High Court. At para 4, the decision of the High Court was confirmed in the following terms:

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 work 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 work 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 & Anr., 1967 (3) SCR 577. 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 upto 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.

10. In KEC International Limited (supra) a Division Bench of the Karnataka High Court considered a challenge to the constitutionality of Section 19-A of the Karnataka Sales Tax Act,1957 providing for deduction of tax at source on turnover from works contract. Section 19-A, akin to Section 13, uses the term ‘shall’ while directing the deduction of tax at source, but did not exclude categories of those transactions that would not come within the ambit of taxation, such as, labour contracts, interstate transactions or transactions not amenable to tax. The Bench held the provision to be unconstitutional, observing at paragraph 15 that, had only the provision clarified the position that it would not apply qua those transactions that are not amenable to tax, it would have been inclined to uphold its constitutionality. At paragraph 16, they consider the argument that it was only a provision for advance collection andprevention of evasion of tax, but reject the same as over simplification stating that ‘ Though Section 19-A is 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’.

11. The Gujarat High Court in the case of Cibatul Limited, P.O. Atul V. Union of India ((1979) 4 ELT 407) observed that when testing the validity of a machinery provision, the general principle was that, if the charging section was intravires, the machinery would also normally be intravires subject to the condition that it does not ‘stretch its long arms to pick- up the forbidden fruit along with others’. Thus, even an ancillary provision enacted to aid the process of collection of tax would have to stay confined within the four corners of legislative power conferred under the entries enumerated in the lists under the Constitution.

12. The Bench also rejects the argument of the State that whatever was deducted would be ultimately adjusted against tax liability and excess, if any, refunded, taking judicial note of the position that refunds by the Commercial Taxes Department were normally, notoriously delayed.

13. There is thus no doubt in my mind, and it is also not the case of the revenue that ‘TDS’, whether collected under the nomenclature of ‘amount’, ‘deposit’ or ‘tax’ is with the full blessing and authority of the law.

14. The provisions of Section 13 are not under challenge and rightly so, since in drafting Section 13, the rationale of aforesaid judgments and many others that have taken a similar view, stand incorporated. Section 13, has, in directing the deduction of tax at source, specifically excluded from its purview three categories of transactions, labour contracts, inter-state transactions, and exempt transactions that stand outside the pale of taxation. Section 13, thus passes the test of constitutionality and the inference that flows from this conclusion is that any amount deducted in line with the mandate of Section 13, have to be with the authority of law.

15. To decide this question, I prefer not to go by the nomenclature of the terms employed, since the relevant statutory provisions, rules and forms use terms such as deposit, amount, tax and other similar terms, interchangeably. The language employed varies and will not be decisive in this regard.

16. Article 265 states that no amount may be collected sans the authority of law. Thus, when a payer deducts any amount from out of the amounts payable to a payee/contractee, it is with the full authority of the law. The purpose of such deduction is to facilitate advance payment of tax. This is clear from the fact that whatever is deducted is immediately credited to the account of deductee and is automatically reflected as tax credit.

17. A comparison has been made with the provisions of Income Tax Act, 1961 (in short ‘I.T. Act’) to illustrate the difference between the provisions of Section 13 of the TNVAT Act and 217 of the I.T. Act that provides for advance tax. Since Section 217 of the I.T Act states that any amount paid in advance shall assume the character of tax, and no such validation is available in Section 13, the Revenue would argue that the purposes are different and Section 13 never envisaged that what was deducted be construed as a tax.

18. The purpose of Section 13 is to facilitate an advance collection of tax. The concept of an advance tax is not alien to revenue laws and tax deduction/tax collection was envisaged to facilitate certainty in collection of tax and a spread over of tax liability over the year, so that an assessee is not mulcted with an enormous liability towards the close of the year. The destination of the tax deducted is towards defraying tax liability only. If this be the case, can one legitimately take the argument that what is deducted would constitute anything other than a tax ? The excess/short fall available post deduction and determination of tax liability would arise from various situations, such as multiple lines of activity, each with its own tax implications, the quantum of ITC available to be carried forward, to name a few. The ultimate quantification would give rise to a demand if there is a shortfall in the in tax credit, and a refund, if the credit is in excess. This is a matter for computation and can hardly impact a decision on the nature of the amount deducted. In a situation where an asseesee is only a works contractor, then the rate of tax qua the transaction has been crystallised in Section 13 as being 2% for civil works contracts and civil maintenance works contract and 5% in respect of all other kinds of works contracts.

19. Section 5 of the TNVAT Act is a charging Section for Works contracts and reads as follows:

5. Levy of tax on transfer of goods involved in works contract.- (1) Notwithstanding anything contained in this Act, but subject to the provisions of this Act, every dealer, shall pay, for each year, a tax on his taxable turnover, relating to his business of transfer of property in goods involved in the execution of works contract, either in the same form or some other form, which may be arrived at in such manner as may be prescribed, at such rates as specified in the First Schedule. Explanation. – Where any works contract involves more than one item of work, the rate of tax should be determined separately for each such item of work. (2) The dealer, who pays tax under this section, shall be entitled to input tax credit on goods specified in the First Schedule purchased by him in this State.

20. Section 6 deals with compounding qua works contract and extends an option to a dealer to pay tax at the flat rate of 2% /5%. In the case of an assessee falling under Section 5, the methodology to be applied in the computation of turnover and determination of output tax liability would be more complicated. Section 13 however makes no differentiation between deduction of tax in the case of assessees falling under Section 5 or 6. Evidently, the nature of the amounts deducted in both cases have to be one and the same and cannot differ, notwithstanding the differences in the application of both provisions. What is deducted in both cases thus, constitutes only a tax and the difference in nomenclature is irrelevant in deciding this issue.

21. I am supported in this regard by the provisions of Section 13(4) which says that the amount deducted and deposited under Section 13(2) will be adjusted by the Assessing Authority towards tax liability of the dealer, both under Section 5 or Section 6 and shall constitute good and sufficient discharge of such liability.

22. In the case of Modi Industries (supra), and Gujarat Fluro Chemicals (supra) relied upon by the revenue, the Supreme Court was concerned with a prayer for interest on excess of advance tax paid by an assessee under the provisions of the Income Tax Act. In Modi Industries, the Court held that advance tax or TDS loses its identity once it is adjusted towards final liability and assumes the character of tax paid pursuant to a demand raised in assessment. A three Judge Bench clarified the position that any excess paid would not assume the character of tax and no interest is payable under Section 214/215 by application of Section 219 of the IT Act. At para 47, the question is posed and answer stated as follows:

47……….This means that in the assessment order, the Income Tax Officer will have to give credit for the advance tax paid by the assessee by treating the entire amount as income tax paid by the assessee. Thereafter, if there is any excess sum it will be refunded or if there is any shortfall in the payment of advance tax, that will be recovered by the Income Tax Officer. The amount standing to the credit of the assessee, upon assessment and after adjustment of the tax liability as quantified in the assessment order, loses its character as advance tax. It becomes an amount refundable as determined in the order of assessment. If after adjustment of the tax liability any excess amount is standing to the credit of the assessee, interest will be paid on that excess amount upto the date of the assessment order and, thereafter, the assessment order will contain a direction to refund the excess amount. The amount will be refunded with interest, if any, under Section 243.

23. In Gujarat Fluro Chemicals the point that arose was what the character of TDS or advance tax would be under the Income Tax Act and whether interest would be payable by the revenue, if excess advance tax had been paid by an assessee or if excess tax had been deducted at source when compared with the assessed tax. Thus the Court was faced with the question of whether the assessee is not entitled to interest for any such excess paid or deducted.

24. There is a distinction between the Income Tax Act and the Sales Tax Act insofar as the concept of carry forward of credit does not form part of the scheme of the IT Act. Under the IT Act, an amount paid as advance tax or amount deducted as tax will have limited use only qua the relevant assessment year. Advance tax is paid in four instalments, spread over the previous year relevant to an assessment year. Tax is deducted at source in regard to those transactions that have transpired during the financial year relevant to an assessment year. Such advance tax and TDS will be set off while computing the income relevant for that assessment year only and a refund of excess advance tax paid or a refund of excess tax deducted/collected at source will be determined in that assessment year itself. The Sales Tax enactments also provide for a refund upon completion of assessment that is issued in Form P. A RAO, on the other hand, is not a statutorily sanctioned document and no provision or Rule is brought to my notice in support thereof.

25. Form P determines the refund after adjusting the monthly payments made towards the final tax liability. This has no bearing on the scheme of tax credit in vogue under the Sales Tax Act that provides for carry forward of credit from year to year, such carry forward and accumulated credit automatically reflected in the account of the assessee with the department and automatically set off against output tax liability.

26. The observations of the Supreme Court to the effect that advance tax and TDS under the provisions of the Income tax Act do not carry interest as they do not bear the character of tax, are not applicable to the issue in discussion now.

27. The argument that at the time of deduction, the amount (for want of a better word) is an ‘deposit’, when adjusted, it assumes the nature of ‘tax’, when carried forward, it bears the character of ‘credit’ and when refunded, it bears the character of an ‘amount’ would result in a distorted and imbalanced interpretation of the provisions of the Act and scheme set out thereunder.

28. I am thus of the view that once that any deduction made towards anticipated tax liability would assume the character of tax and will not change or fluctuate depending on whether it is held as credit or whether it is an adjustment against tax liability. To attribute such fluctuating character to an amount would distort the scheme of taxation and cause much difficulty in the interpretation on the various ancillary provisions. The interpretation of the provision must be such that it lends itself to certainty in its conclusion.

29. Though only supportive, the substituted Rule 9 (with effect from 29.01.2016) also appears to clarify this position. While erstwhile Rule 9 dealing with tax deduction at source stated that ‘any person who makes a deduction under Section 13 shall deposit the same so deducted’ with the assessing authority, the amended rule reads ‘any person liable to make deduction and payment of tax under Section 13 shall apply to the registering authority having jurisdiction over the person for a Tax Deductor Identification Number’, prior to effecting such deduction. Perhaps Legislature, by employing the language in the substituted Rule has clarified the position that the ‘deposit’ and ‘amount’ , referred to in Section 13 are only of the nature of tax.

30. The argument that a refund, by collective experience takes an enormous length of time to reach the assessee, and hence the amount deducted must be allowed to carried forward cannot be accepted. As held by the Supreme Court in Amrit Banaspati (supra) any amount of procedural wrangles, difficulties and inefficiencies in the manner of working and administration, cannot justify interpretation of a provision in one way and not another. A provision would have to be interpreted on the strength of the object and reasons for which it was inserted and bearing in mind the overall scheme of the Act.

31. Section 140 of the Act talks of carrying forward of the credit of ‘VAT’ and Entry Tax under the existing law, defined under Section 2(48) of the TNGST Act to mean any law, notification, order, rule or regulation relating to levy and collection of duty or tax on goods or services made prior to the commencement of the TNGST. Since the amount collected/deducted has been captured in the returns of turnover filed under the erstwhile TNVAT regime, I accept the stand of the petitioners to the effect that such amounts would stand included for the purposes of transition under Section 140.

32. My conclusion also finds support from the language of Section 20 of the TNVAT Act dealing with assessment of tax, as per which, tax under that Act was to be assessed, levied or collected in the manner prescribed, bringing within the ambit of assessment, collection by way of deduction under Section 13 of that Act.

33. In Magma Fincorp Ltd. V. State of Telangana (2019 (26 GSTL 7) the High Court at Telangana has considered this very issue, interpreting Section 140 purposively stating that ‘Once it is admitted that credit was available to the petitioner on the date of switch over from VAT regime to GST regime and once it is admitted that the petitioner may be entitled to make a claim for this credit in other modes, we think that the second respondent ought to have given a purposive interpretation to Section 140 of the Act read with Sections 16 to 21 of the Telangana GST Act 2017. As he has failed to do the same, the matter requires reconsideration’. Section 140 of the Telangana Goods and Service TaxAct, 2017 is in pari materia with the same provision in the TNGST and the observations of the Telangana High Court would also support the view I have now taken.

34. A detailed circular has been issued on tax deduction at source (Circular No.54 of 2014 bearing Ref.No.D3/34075/2011) wherein the Principal Secretary/Commissioner of Commercial Taxes Dated 14.11.2014 has issued guidelines on the subject of taxability of works contracts, including the aspects of assessment and TDS. The relevant portions of the Circular are extracted below:

. . . . . . .

(H) Value of the goods for the purpose of making assessment on works contract:

In order to determine the assesable value of the goods, it is permissible to take the entire value of the works contract as the basis and the value of the goods involved in the execution or the works contract can be arrived at by deducting the following amounts from the value of the works contract:-

(1) All amounts involved in respect of goods involved in the execution of works contract,

i. In the course of export of the goods out of the territory of India or
ii. In the course of import of the goods into the territory of India or,
iii. In the course of inter-state trade or commerce

RuIe 8 (5)(a)

(2) Goods involved in the execution of works contract which are specifically exempted from tax

Rule 8 (5)(b)

(3) All amounts paid to the Sub-contractors:

Condition: – The Sub-contractor must be a registered dealer under VAT Act, 2006. He must be liable to pay tax under this Act. The turnover of such amount is included in the return filed by him.

Rule 8 (5)( c)

Unless the genuineness of payments made to sub-contractor is ensured by supporting documents such as bank statements, etc, exemption could not be granted. Even if there is any difference in turnover, which shaII be brought under assessment at higher rate of tax.

(4) All amounts towards labour charge and other charges not including any transfer of property in goods, actually incurred in connection with the execution of works contract;

(5) If the charges are not ascertain able from accounts maintained and produced by a contractor before the assessing authority, deduction is allowable at the following rates given below: –

. . . . . . .

35. In Seaford Court Estates Ltd. V. Asher ((1949) 2 ALL ER 155), the Kings Bench speaks eloquently about the language to be employed in interpreting a provision stating:

The question for decision in this case is whether we are at liberty to extend the ordinary meaning of “burden” so as to include a contingent burden of the kind I have described. Now this court has already held that this sub-section is to be liberally construed so as to give effect to the governing principles embodied in the legislation (Winchester Court Ld. v. Miller 17); and I think we should do the same. Whenever a statute comes up for consideration it must be remembered that it is not within human powers to foresee the manifold sets of facts which may arise, and, even if it were, it is not possible to provide for them in terms free from all ambiguity. The English language is not an instrument of mathematical precision. Our literature would be much the poorer if it were. This is where the draftsmen of Acts of Parliament have often been unfairly criticized. A judge, believing himself to be fettered by the supposed rule that he must look to the language and nothing else, laments that the draftsmen have not provided for this or that, or have been guilty of some or other ambiguity. It would certainly save the judges trouble if Acts of Parliament were drafted with divine prescience and perfect clarity. In the absence of it, when a defect appears a judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of Parliament, and he must do this not only from the language of the statute, but also from a consideration of the social conditions which gave rise to it, and of the mischief which it was passed to remedy, and then he must supplement the written word sc as to give “force and life” to the intention of the legislature. That was clearly laid down by the resolution of the judges in Heydon’s case, and it is the safest guide to-day. Good practical advice on the subject was given about the same time by Plowden in his second volume Eyston v. Studd. Put into homely metaphor it is this: A judge should ask himself the question: If the makers of the Act had themselves come across this ruck in the texture of it, how would they have straightened it out? He must then do as they would have done. A judge must not alter the material of which it is woven, but he can and should iron out the creases.

36. In the light of the detailed discussion as above, the impugned orders are set aside, and the petitioners held to be entitled to transition TDS under the TNVAT Act in terms of Section 140 of the TNGST 2017. Allowed. Connected Miscellaneous Petitions are closed with no order as to costs.