Pradipta Ray, J. (Chairman) -
(1.) PETITIONER No. 1, Builders' Association of India, is an association of those who are engaged in construction business in different States of India. Builders' Association of India (hereinafter referred to as, "the association") is registered under the Indian Trusts Act to espouse the cause and to protect interests of its members. Petitioner No. 2, M/s. Gammon India Ltd., is a well known company engaged in large scale constructions. In this application the Petitioners have questioned constitutional validity of Section 40 of the West Bengal Value Added Tax Act, 2003 (in short, "the VAT Act") providing for deduction of an amount at source from payments made to works contractors executing works contracts for adjustment against payable sales tax and also the practice/system of deducting prescribed amount at source towards sales tax from all payments made by any person to any dealer for execution of works contract. Person making any payment for execution of works contract is hereinafter described as "owner" or "contractee". The contractor executing works contract and receiving payment is hereinafter referred to as the works contractor.
(2.) FOR better appreciation of the issues involved herein relevant portions of Section 40 of the VAT Act and the connected rules of the West Bengal Value Added Tax Rules, 2005 (in short, "the VAT Rules") are reproduced below:
40. Deduction at source from payment to a dealer against execution of works contract. -(1) Notwithstanding anything contained in Section 32 or any rules made thereunder or any terms of a contract to the contrary, any person responsible for paying any sum to any dealer for execution of a works contract referred to in Section 14, wholly or partly in pursuance of a contract between such dealer and:
(b) a local authority,
(c) a corporation or a body established by or under any law for the time being in force,
(d) a company incorporated under the Companies Act, 1956 (1 of 1956), including a Government undertaking,
(e) a co -operative society registered or deemed to be registered under the West Bengal Co -operative Societies Act, 1983 (West Ben. Act XLV of 1983),
(f) an educational institution,
(g) a promoter, (h) any bank,
(i) any hospital or nursing home or diagnostic centre, or
(j) a partnership firm,
shall, at the time of payment of such sum in cash or by issue of a cheque or draft or any other mode of payment, deduct an amount towards tax equal to:
(i) two per centum, when such contractor is registered under the Act and such registration is valid on the date of making such payment; or
(ii) four per centum, in all other cases:
Provided that no deduction under this sub -section shall be made, -
(i) where the payment is made as advance prior to the commencement of the execution of such works contract; or
(ii) where no transfer of property in goods (whether as goods or in some other form) is involved in the execution of such works contract; or
Provided further that no deduction under this sub -section shall be made in respect of that part of payment to a dealer which represents his contractual transfer price of the goods as referred to in Clause (a) of Sub -section (2) of Section 18, where such dealer declares in writing to that effect claiming exemption from tax.
(3) After the deposit of the amount under Sub -section (2), the person who makes the deduction and deposit, shall, within fifteen days from the date of such deposit, issue to the dealer a certificate in the prescribed form for each deduction separately and send a copy of receipted challan or a copy of the account statement referred to in Sub -section (2), as the case may be, to the Commissioner along with the relevant certificate of deduction and such document as may be prescribed.
(4) On receipt of a certificate of deduction referred to in Sub -section (3), the deposit of an amount of a dealer referred to in Sub -section (2), shall be adjusted by the Commissioner towards tax liability of the dealer under Section 18, and shall constitute a good and sufficient discharge of the liability of the person deducting such amount to the dealer to the extent of the amount deducted and deposited.
(5) Where any person, while paying any sum to a dealer, contravenes the provisions of Sub -section (1), Sub -section (2) or Sub -section (3), he shall be personally liable for such contravention, and the Commissioner may, after giving him an opportunity of being heard, by order in writing and in such manner as may be prescribed, impose on such person a penalty, not exceeding twice the amount required to be deducted and deposited by him into the appropriate Government Treasury.
(6) Where the dealer from whose account any amount has been deducted under Sub -section (1) and deposited under Sub -section (2) proves to the satisfaction of the Commissioner that he is not liable to pay tax under Section 14 and such amount was not wholly or partly payable by him under this Act, the Commissioner shall refund or adjust the amount refundable to the dealer in such manner as may be prescribed.
Rule 46. Deposit of the amount towards payment of tax for works contract deducted at source. -(1) Where a deduction of an amount towards payment of tax in respect of any works contract is made at source by a Government, authority or person under Sub -section (1) of Section 40 from any dealer, the person making such deduction for such Government, authority or for himself shall, within ten days from the expiry of each english calendar month, deposit under the appropriate challan into the appropriate Government Treasury the total amount so deducted from one or more dealers during the immediately preceding month.
(2) to (7) ...
Rule 47. Issue of certificate of deduction of the amount towards payment of tax on works contract. -The person who deducts and deposits any amount towards payment of tax in respect of works contract under Sub -rule (1) or Sub -rule (6) of rule 46 shall, within fifteen days from the date of deposit, issue a certificate of deduction in form No. 18 in respect of such dealer.
Appearing for the Petitioners Dr. D. Pal, learned senior advocate, has referred to Section 40 and has submitted that the provision making it obligatory for any person making any payment to a dealer for executing a works contract to deduct two per cent or four per cent as the case may be, from the amount so paid is contrary to the decision of the Supreme Court in Gannon Dunkerley & Co. v. State of Rajasthan,  88 STC 204 and unconstitutional inasmuch as only the price of goods, property of which get transferred from the contractor to the owner/contractee, can be subjected to tax by the State Legislature. He has further submitted that in absence of any mechanism for ascertaining the value of the transferred goods after exclusion of non -taxable components the provision for compulsory deduction at source by the owner, is unworkable, arbitrary, irrational and unreasonable. In support of his submission Dr. Pal has relied on various judgments particularly the judgment of the Jharkhand High Court in Larsen and Toubro Limited v. State of Jharkhand reported in,  140 STC 134.
(3.) MAIN part of Section 40 makes it obligatory for any person "responsible for paying any sum to any dealer for execution of works contract referred to in Section 14" to deduct prescribed amount at the time of payment, (emphasis1 ours). Section 14(2) of the VAT Act has imposed liability to pay tax on all transfers of property in goods involved in the execution of works contract. Sub -section (1) of Section 14 has created a fiction providing that any transfer of property in goods involved in the execution of works contract shall be "deemed sale" by the contractor and "deemed purchase" by the owner (contractee). Legal liability to pay tax on the price of the goods deemed to be sold under Section 14 does not extend such liability to any other aspect of contract price than the sale price of goods transferred for the purpose of executing a works contract.;