- (1.) Before it was held to be unconstitutional on 28th April, 1993, Section 13-AA 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 other 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 rupees 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 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".
(2.) Section 13-AA, as it was then read, was struck down by the High Court of Orissa on 28th April, 1993 in the case of Brajendra Mishra v. State of Orissa, (1994) 92 STC 17. The High Court held that Section 13-AA 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 13-AA 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 13-AA 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 13-AA authorised deduction of two per cent from the bills of the contractor, it could not be held to be unconstitutional and void.
(3.) The decision of the High Court was accepted and Section 13-AA 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 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 rupees 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 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.";