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M/S Prakash Engineers v. State Of U.P. & Others - WRIT TAX No. 781 of 2006 [2006] RD-AH 8423 (26 April 2006)


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Court No. 36

Civil Misc. Writ Petition No. 781 (Tax) of 2006

M/S Prakash Engineers Vs State of U.P. and others

Hon'ble Sushil Harkauli, J.

Hon'ble Vikram Nath, J.

We have heard the learned counsel for the petitioner, the learned Standing Counsel, representing respondent nos. 1, 2 and 3, Sri Satish Chaturvedi, representing the respondent no.5 and Sri Vivek Saran, representing the respondent no. 4. The Vakalatnama filed by Sri Satish Chaturvedi, may be kept on the record.

We have examined the writ petition as well as supplementary affidavit. No counter affidavit is necessary as a pure legal question arises about the interpretation of the Circular dated 30.11.2005 of the Commissioner, Trade Tax, U.P. particularly clauses 4 and 5 of that circular which are reproduced below:

"4. mDr izdkj ds ekeyksa es MkfDBzu vki vutLV ,utjhesUV ykxw djus dk vfHkizk; ;g gksxk fd ;fn lzksr ij 4 izfr'kr ls de dVkSrh  djus ;k dksbZ dVkSrh u djus dk dksbZ fuosnu izLrqr fd;k tkrk gS rks ;g vo'; ns[kk tk;s fd lafonk ds vuqcU?k esa dj ds Hkkj dks fdl nj ls 'kkfey fd;k x;k gSW ;fn dj dk Hkkj 4izfr'kr ;k mlls vf/kd nj ls

'kkfey gS rks 4 izfr'kr ls de dh nj ls lzksr ij dVkSrh dk vkns'k tkjh djuk fof/k vuq:Ik ugha gksxk vkSj blls lafonkdkjksa dk vfu;fer votLB ,ujhpesUB ds lkFk lkFk jktLo dh {kfr Hkh gksxh !

5.  vr% /kkjk 8 Mh   (1) esa dksbZ Hakh  vkns'k ikfjr djrs le; bldk ijh{k.k vkj vkns'k esa mYys[k vfuok;Z :Ik ls fd;k tk;s fd dk;Z lafonk ds vuqcU/k esa dj dk Hkkj fdl nj ;k fdu njksa ls'' 'kkfey gS vkSj de nj ls dVkSrh dk vkns'k rHakh ikfjr fd;k tk;s rc izHkkoh vkSlr 4 izfr'kr ;k mlls vf/kd u gks"  

The controversy may be briefly summarized as below:

Section 7-D of the U.P. Trade Tax Act 1948 permits a scheme for compounding whereby the Assessing Authority, subject to directions of the State Government, may agree to accept a composition money either in lump sum or at an agreed rate on the turnover of the dealer in lieu of tax that may be payable. The Scheme for Composition is issued by State Government from time to time prescribing the rates.  

In the present case we are concerned with the "work contracts" in which property in some "goods" is transferred under the contract.  In respect of such ''goods' which may be transferred in the course of a ''work contract' trade tax liability is attracted. When composition is granted normally the rate of tax is reduced in respect of such goods. In the present case the scheme provides for a rate of 2%.

However, while making payment to the contractor the principal, for whom the contract is being performed, is obliged to make deduction of tax at source at a particular rate. In the present case the rate is 4 %. The contractor obtaining compounding and thereby reducing liability has the right to apply under section 8-D of the Act to the Assessing Authority seeking lower rate of TDS and the Assessing Authority has the discretion to grant such reduced rate of TDS.

By the impugned circular dated 30.11.2005 of the Commissioner, Trade Tax, U.P. which is enclosed as Annexure-1 to this writ petition, it has been directed vide paragraph 5 thereof that reduced rate of TDS should be granted only where the Assessing Authority is of the opinion that the effective average rate of tax passed on by the contractor is less than 4% in respect of the goods transferred under the work contract.

The Assessing Authority interpreted the said circular to mean that unless the assessee has been able to establish that trade tax at the rate of less than 4%  has been passed on by the assessee under the work contract the reduced rate of TDS under Section 8(D) of the Act cannot be allowed, and accordingly the Assessing Authority vide order dated 18.3.2006 has rejected the application under section 8(D) of the Act.

The two alternative views canvassed in this case from the petitioner and respondent sides are given below:

The department's contention is that the impugned circular of the Commissioner dated 30.11.2005 should be interpreted and implemented so as to make it obligatory upon the contractor to prove in the proceedings under section 8-D that he has not passed on tax liability in excess of 4% under the work contract and only upon such proof being given by the contractor to the satisfaction of the Assessing Authority, the reduced rate of TDS should be granted by the Assessing Authority.  It is contended that the contractor is the best person to know the extent of tax liability passed on by him under the contract.

From the side of the petitioner it is contended that the argument of the department does not take into account the fact that although at the time of determining the contract amount the contractor may take into account the tax liability and incorporate the same in the total amount, but in the present competitive times, securing the contract by auction or tender or tender coupled with negotiation is a very important consideration for contractors and for this purpose the lump sum amount originally arrived at may require to be reduced to meet the competition from other bidders. In case of such reduction of lump sum amount it would be very difficult if not impossible to compute as to whether and if so by how much the tax liability originally proposed to be passed on has been reduced.  Further, in this process of reduction the contractor may, with a view to securing the contract, decide to absorb part of the tax liability in his profits. At the time of reduction of lump sum amount, the break up is not necessarily taken into consideration by the contractor because the prime target at that point of time is to secure the contract by giving a lower bid.  

While considering the above rival submissions we have also considered the fact that the tax deducted at source is not the final word.  It is only a tentative deduction and at the time of filing return or assessment any excess tax paid or deducted at source is liable to be refunded.  Similarly, any short fall in the tax paid or tax deducted at source is to be made good by the dealer upon a self-assessment.   It is common knowledge that the process of refund from the government departments is a tedious and long drawn out process, where as collection of short falls in tax by the departments is comparatively an easier process.   Further, collection of excess tax at the tentative stage of TDS is likely to block the business capital of the dealer.

In view of the above, we are of the opinion that the better interpretation in such matters is not to place the burden upon the dealer but to leave it to the Assessing Authority to find out with the help of the material furnished by the contractor, either voluntarily, or upon the demand made by the Assessing Authority, about the extent of the tax liability passed on under the contract and also not to allow the Assessing Authority to refuse  lower rate of TDS in cases where the composition has been allowed, unless the Assessing Authority is in a position upon the materials aforesaid to record a finding with the cogent reasons that the tax liability passed on under the work contract is 4% or higher.

Now, where the work contract specifically and separately mentions the rate of trade tax the liability which is being passed on by the contractor, no difficulty would arise.

        But where the contract amount does not disclose separately the rate of trade tax passed on, we are of the view that it will be for the Assessing Authority to examine the contract and such other material as it may be entitled to call for from the dealer/contractor for determining as to whether the contractor has passed on trade tax burden at 4 % or higher.  If the material which becomes thus available with the Assessing Authority is sufficient for the Assessing Authority to record a cogent reasoned finding about the rate of tax liability passed on in the work contract in respect of the goods transferred under the same and the finding so recorded shows that the tax liability passed on is 4% or higher, only in such event, the Assessing Authority will be justified under section 8 D of the Act in refusing reduced rate of TDS in accordance with the circular.

However, if the Assessing Authority finds itself unable to record a positive and reasoned finding that the tax liability passed on under the work contract is 4% or higher, it would not be proper for the authority to reject the application seeking reduced rate of TDS on the ground that the contractor has not been able to establish that he is not passing on a tax liability of 4 % or higher.

          The Assessing Authority has referred to certain decisions of the Supreme Court laying down that the normal presumption is that the dealer has passed on the tax liability, and if the dealer contends otherwise the burden of proof would be on the dealer. Those decisions in the present context would mean that the presumption is that the reduced tax liability of 2 % under the compounding order has been passed on. No other presumption of passing on a higher rate of tax is permissible.  

In the light of the above view, we allow this writ petition and quash the impugned order dated 18.3.2006 (Annexure-2 to this writ petition) and require the Deputy Commissioner, to consider the matter afresh in the light of the above interpretation of the Commissioner's circular.

Dated: 26.4.2006



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