In this batch of petitions under Article 226 of the Constitution, the petitioners, claiming to be private unaided institutions, have challenged the validity of the provisions of Section 34 of the U.P. Value Added Tax Act, 20081 and a notification dated 7 October 2013.
Section 34 deals with deduction of tax at source.
By sub-section (1) of section 34, the legislature has provided as follows:
"Without prejudice to any other mode of recovery, payment or collection of tax under this Act, the State Government may, by notification in the Gazette, direct that, in a specified case and in the specified circumstances but subject to such conditions as may be specified, every specified person responsible for making payment to the selling dealer, for discharge of liability on account of valuable consideration payable on sale of goods in such cases as may be specified, shall, at the time of making such payment to the seller, either by credit or in cash or in any other manner, towards satisfaction of tax payable by the dealer on account of sale of any taxable goods, deduct an amount determined in the manner specified:
Provided that where in case of a works contract, the contractor has awarded a sub-contract and the notification provides for deduction of amount by the contractee from the payments made to contractor, the contractor responsible for making any payment or discharge of any liability to any sub-contractor, in pursuance of a contract with the sub-contractor, shall, while making payment to the sub-contractor, deduct amount of tax referred to above.
Provided further that where in case of a works contract, the contractor has already made deduction from the payments made to his sub-contractor, the amount of such payments shall be deducted from the amount on which deduction is to be made by the contractee to the contractor.
Sub-sections (2) to (14) of section 34 of the Act provide as follows :
"(2) Upon issue of a notification under sub-section (1), where-
(a) a dealer, who makes sale of any taxable goods and in whose case notification referred to in sub-section (1) applies, for any reason claims that he either is not liable to pay tax on such sale or is liable to pay as tax an amount lesser than amount of deduction computed in the manner provided; or
(b) the person responsible for making payments to the dealer selling the goods is unable to ascertain the turnover of any goods sold, the person responsible for making payment shall require the selling dealer to produce direction issued in this behalf by the assessing authority of the selling dealer and shall act according to such direction of the assessing authority.
(3) Where purchasing dealer himself is liable to pay tax on turnover of purchase of any goods by virtue of any provision of this Act, he shall not deduct any amount in respect of turnover of such goods.
(4) In the circumstances under sub-section (2), the dealer selling goods may, for issue of direction to the purchaser to deduct an amount lesser than the proposed amount of tax or not to deduct any amount as tax, apply to the assessing authority having jurisdiction over the principal place of his business or if he has no fixed place of business, to the assessing authority in whose jurisdiction he ordinarily resides.
(5) The assessing authority referred to in sub-section (4), after examining the liability of payment of tax of the dealer in respect of sale of goods made and after giving reasonable opportunity of being heard to the dealer, shall by an order in writing direct the purchaser of the goods accordingly.
(6) The amount deducted under sub-section (1) shall be deposited into the Government Treasury by the person making such deduction before the expiry of the 20th day of the month following that in which deduction is made:
Provided that where the purchaser of goods referred to in sub-section (1) is a registered dealer, he shall deposit the amount of deduction in the manner and within the time in which amount of tax for the tax period in which purchase has been made, is payable and such dealer shall be entitled to claim input tax credit in accordance with provisions of section 13 in respect of such purchase.
(7) The person making deductions under sub-section (1) shall, at the time of payment or discharge, furnish to the selling dealer a certificate of amount deducted in such form and manner and within such period as may be prescribed and shall submit such statement of all such purchases, payments and deductions made and certificates issued by him, in such manner and within such time, as may be prescribed.
(8) If any person referred to in sub-section (1) fails to make the deduction or after making deduction fails to deposit the amount so deducted as required by sub-section (6), the assessing authority may, after giving to such person an opportunity of being heard, by order in writing, direct that such person shall pay, by way of penalty, a sum not exceeding twice the amount deductible under this section but not so deducted and, if deducted, not so deposited into the Government Treasury.
(9) Without prejudice to the provisions of sub-section (8), if any such person, after deducting, fails to deposit the amount so deducted, he shall be liable to pay simple interest at the rate of fifteen percent per annum on the amount not so deposited from the date on which such amount was deducted to the date on which such amount is actually deposited.
(10) Where the amount has not been deposited after deduction, such amount together with interest referred to in sub-section (9) shall be recovered as arrears of land revenue from the person who has deducted and such amount shall be a charge upon all the assets of the person concerned.
(11) Nothing contained in this section shall prevent the assessing authority from making an assessment of tax payable by the dealer in accordance with other provisions of this Act and the dealer shall be liable to pay tax in accordance with other provisions of this Act.
Provided that any deduction made in accordance with the provisions of this section shall be treated as a payment of tax on behalf of the selling dealer, and credit shall be given to him for the amount so deducted on the production of the certificate, referred to in sub-section (9) in the tax return of the relevant period or the assessment made, as the case may be, and any amount found in excess of tax due shall be refunded to the selling dealer.
(12) No deduction of any amount shall be made under this section if the person selling the goods is not a dealer, but the onus to prove that goods have been purchased from a person other than a dealer shall lie on the person responsible for making payment, failing which it shall be deemed that goods have been purchased from a dealer.
(13) Where the person responsible for making deduction in respect of a sale under a works contract is unable to ascertain the amount of deduction and the contractor or the sub-contractor, as the case may be, does not produce direction referred to in sub-section (2) from its assessing authority, the person responsible for making deduction shall deduct an amount which shall be four percent of the gross amount of payment.
(14) No deduction under this section shall be made on the turnover of sale where such sale takes place :-
(i) in the course of inter-State trade or commerce; or
(ii) outside the State; or
(iii) in the course of the export out of, or import into, the territory of India.
Explanation - For the purposes of this section, assessing authority in relation to person responsible for making payments to the selling dealer means the officer having jurisdiction over the place where the principal place of business of such person inside the State is located and where such person has no such place, the place where the residence of such person inside the State is located."
In exercise of powers conferred by sub-section (1) of section 34, a notification has been issued on 7 October 2013 in the following terms :
"In exercise of the powers under sub-section (1) of section 34 of the Uttar Pradesh Value Added Tax Act, 2008 (U.P. Act No.5 of 2008), the Governor is pleased to direct that with effect from October 08, 2013, every person responsible for making payment to the selling dealer, for discharge of liability on account of valuable consideration payable on sale of goods shall, at the time of making such payment to the seller, either by credit or in cash or in any other manner, towards the satisfaction of tax payable by the dealer on account of sale of any taxable goods, deduct an amount equal to four percent of the value of goods :
Provided that this notification shall not be applicable except in the cases of the transactions between the dealer and, -
(a) a Department of the Central Government or of any State Government; or
(b) a Local Authority under any Act for the time being in force in the State of Uttar Pradesh; or
(c) a Corporation or Undertaking established or constituted by or under a Central Act or a Uttar Pradesh Act; or
(d) a University or an Educational Institution or a Training Centre."
By the notification dated 7 October 2013, a liability to deduct tax equivalent to 4% of the value of the goods at source has been imposed on every person responsible for making payment to the selling dealer for discharge of a liability on account of consideration payable on the sale of goods. However, as a result of the proviso, the notification applies only to transactions between a dealer and the entities more specifically provided in clauses (a) to (d) of the proviso. In other words, for the notification to apply and for the liability to deduct tax at source to arise, the person liable to make payment to a dealer must fall within the descriptions contained in clauses (a) to (d). In the present case, what is in question is clause (d) of the notification under which the person liable to make payment to a dealer is a University, an educational institution or a training centre.
The provisions of section 34 are sought to be challenged on the ground that they violate Article 14 of the Constitution and suffer from arbitrariness. The submission is that an unfettered and unguided power is conferred upon the executive by sub-section (1) of section 34 to classify specified persons, cases and circumstances where a liability for deducting tax at source while making payment to a registered dealer is imposed. Hence, it has been submitted that the executive has an unguided discretion to include certain entities and to exclude others while imposing a liability to deduct tax at source. Section 8(d) of the earlier legislation, U.P. Trade Tax Act, it has been urged, confined the liability to deduct tax at source in the case of payment in pursuance of a works contract whereas in the present legislation a much wider liability has been imposed.
The challenge to the legality of the notification dated 7 October 2013 is on the ground that there is no reason or justification, having regard to the nature of the entities specified in clauses (a), (b), (c) and (d) of the proviso to the notification, to bring private educational institutions within the ambit of the liability to deduct tax at source. It is urged that all the other entities which are specified in clauses (a), (b), (c) and (d), save and except for educational institutions and training centers, are departments of the State, whether of the Union or the State Governments, some of them being statutory authorities and hence there was no reason or justification to bring private educational institutions within the ambit of the notification. This, it has been submitted, would amount to a violation of Article 14 of the Constitution. It has been submitted that no material has been placed on record by the State to justify either the reason for enacting section 34 or for bringing private educational institutions within the fold of sub-section (1) of section 34 by the notification dated 7 October 2013. In the alternative, it has been urged that the expression "educational institution" should be read as ejusdem generis and should be confined to aided institutions of the State by excluding from the purview of the notification, private unaided institutions. Private unaided institutions, it has been submitted, are not dealers within the meaning of the VAT Act and hence should be excluded from the liability to deduct tax at source.
On the other hand, it has been urged on behalf of the State by the learned Standing Counsel that : (i) there is a presumption of constitutional validity which is attracted where the vires of a legislation is sought to be questioned and the burden lies on the person who seeks to assail the constitutional validity of a law; (ii) section 34 is not a charging provision but is in the nature of a machinery or collection provision which confers a power on the State Government to impose a requirement in specified cases, to deduct tax at source while making payment to a selling dealer; (iii) the object and purpose of section 34(1) is to check the evasion of revenue. Unaided educational institutions, engage in large scale activities involving purchases from registered dealers and having due regard to the nature and quantum of such activities, it was open to the State Government, acting within the purview of its statutory powers under section 34(1), to impose a requirement of deducting tax at source; (iv) in matters of fiscal legislation, the legislature as well as the executive, when it acts in pursuance of a statutory power is entitled to a wide degree of latitude.
Section 34 of the VAT Act is not a charging provision. This is clear from the opening words of sub-section (1) of section 34 which operate without prejudice to any other mode of recovery, payment or collection of tax under the Act. Sub-section (1) of section 34 allows the State Government to issue a notification providing for the circumstances in which and the conditions subject to which a specified person who is responsible for making payment to a selling dealer towards discharge of a liability for the payment of consideration on the sale of goods is to deduct tax at source towards the satisfaction of the tax payable by the dealer. The liability to pay tax under the VAT Act is of the dealer under section 3. The provision for collecting tax at source does not impose a charge on the purchaser of the goods. The purchaser who is liable to make payment towards the consideration payable to a selling dealer under a transaction involving the sale of taxable goods is required to deduct tax at source towards the satisfaction of the tax payable by the dealer. The expression "towards satisfaction of tax payable by the dealer on account of sale of any taxable goods" makes it clear that liability of paying tax is of the dealer. The purchaser is required to deduct tax towards the satisfaction of the liability of the dealer. In other words, section 34 is a provision which has been made by the legislature to facilitate recovery, payment or collection of tax. It is well settled that whereas the charging provision of a fiscal legislation has to be construed strictly, provisions for machinery and collection are meant to achieve the purpose of the fiscal levy and have to be construed so as to effectuate that objective.
Sub-section (1) of section 34 empowers the State to issue a notification. The provisions which follow, make it clear that the legislature has indicated several safeguards. Under sub-section (2), several situations have been envisaged. The first is where a dealer, who makes a sale of any taxable goods and in whose case a notification under sub-section (1) applies, claims on such sale that he is either not liable to pay tax or is liable to pay tax at a lesser amount than the amount of deduction computed in the manner provided. The second situation is where the person responsible for making payments to the dealer selling the goods is unable to ascertain the turnover of any goods sold. In either of these situations the person responsible for making payment has to require the selling dealer to produce a direction issued in this behalf by the assessing authority of the selling dealer and shall act in accordance with the direction of the assessing authority.
Sub-section (3) provides that where the purchasing dealer himself is liable to pay tax on the turnover of purchase of any goods under the Act, he shall not deduct any amount in respect of the turnover of such goods. Sub-section (4) allows the selling dealer to apply to the assessing authority, in the circumstances under sub-section (2), where he seeks a direction to the purchaser to deduct an amount lesser than the proposed amount of tax or not to deduct any amount as tax. Under sub-section (5), the assessing authority, after examining the liability for payment of tax by the dealer, shall by an order in writing direct the purchaser of goods accordingly. Sub-section (7) requires the person making deductions to issue to the selling dealer a certificate of the amount deducted in such form and manner as prescribed. Sub-section (8) provides for a penalty for a breach of the requirements of making a deduction of tax at source, while sub-section (9) provides for the payment of interest. Sub-section (10) provides for the recovery of the dues as arrears of land revenue. Under sub-section (12), it has been stipulated that where the person selling the goods is not a dealer, no deduction of any amount shall be made in the section but the onus to prove that goods have been purchased from a person other than a dealer lies on the person responsible for making payment.
Rule 49 of the Uttar Pradesh Value Added Tax Rules, 20082 provides for the procedure for deduction of tax at source and for implementing the provisions of section 34.
While dealing with the submission that sub-section (1) of section 34 confers an unguided and unchannelised power, it would at the outset be appropriate to begin with a presumption of constitutionality that attaches to a legislation enacted by Parliament or as the case may be, by a State legislature. This principle has been formulated in the following observations of the Supreme Court in the State of Bihar & Ors. Vs. Bihar Distillery Ltd. & Ors.3 :
"Now coming to the reasoning in the impugned judgment, we must say with all respect that we have not been able to appreciate it. The approach of the Court, while examining the challenge to the constitutionality of an enactment, is to start with the presumption of constitutionality. The Court should try to sustain its' validity to the extent possible. It should strike down the enactment only when it is not possible to sustain it. The Court should not approach the enactment with a view to pick holes or to search for defects of drafting, much less inexactitude of language employed. Indeed, any such defects of drafting should be ironed out as part of the attempt to sustain the validity/constitutionality of the enactment. After all, an Act made by the Legislature represents the will of the people and that cannot be lightly interfered with. The unconstitutionally must be plainly and clearly established before an enactment is declared as void. .........."
The general principles governing a constitutional challenge on the ground of a violation of Article 14 have been formulated in the judgment of the Constitution Bench of the Supreme Court in In re: Special Courts Bill, 19784. Classification, it is well settled, does not require an exact or scientific exclusion or inclusion of persons or things. The Supreme Court held thus :
"The constitutional command to the State to afford equal protection of its laws sets a goal not attainable by the invention and application of a precise formula. Therefore, classification need not be constituted by an exact or scientific exclusion or inclusion of persons or things. The courts should not insist on delusive exactness or apply doctrinaire tests for determining the validity of classification in any given case. Classification is justified if it is not palpably arbitrary."
In matters pertaining to fiscal legislation, the legislature is entitled to a much wider degree of latitude in matters of classification. This follows the well recognised doctrine that in matters relating to economic regulation, the Court is inclined to give judicial deference to legislative judgment. These principles were formulated in the following observations of the Constitution Bench of the Supreme Court in R.K. Garg Vs. Union of India & Ors.5 :
7. ............ The first rule is that there is always a presumption in favour of the constitutionality of a statute and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles. This rule is based on the assumption, judicially recognised and accepted, that the legislature understands and correctly appreciates the needs of its own people, its laws are directed to problems made manifest by experience and its discrimination are based on adequate grounds. The presumption of constitutionality is indeed so strong that in order to sustain it, the court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation.
8. Another rule of equal importance is that laws relating to economic actives should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J. that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrine or straight jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislature judgment in the field of economic regulation than in other areas where fundamental human rights are involved. .................
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The Court must always remember that "legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry" that exact wisdom and nice adoption of remedy are not always possible and that "judgment is largely a prophecy based on meagre and un-interpreted experience". Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There, may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. .................. The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of any of its provisions. If any crudities, inequities or possibilities of abuse come to light, the legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must guide and inspire the legislature in dealing with complex economic issues."
The validity of legislation, it is well settled, cannot be determined on the basis of its crudities or inequities, particularly when matters of classification in fiscal legislation are involved. The legislature is not bound to bring within the fold of a provision for the deduction of tax at source, all possible transactions in order for the collection or recovery machinery to be lawful and valid. It is open to the legislature to impose a requirement that the liability to deduct tax at source would be attracted in those cases where the legislature or its administrative agency appointed under the law believes that the possibility for evasion must be plugged. Here again, it would be impossible for the legislature to envisage a situation where every possibility for evasion is ruled out. The legislature may, however, legitimately target certain specific situations and circumstances where it believes that it is necessary to ensure due protection of the concerns of the revenue by requiring a deduction of tax at source in respect of certain transactions or in certain specified eventualities. These are matters of legislative judgment. Similarly, the legislature, by conferring a degree of latitude or discretion on the executive, does not breach the requirement of a valid classification under Article 14 of the Constitution.
In Shashikant Laxman Kale & Anr. Vs. Union of India & Anr.6 a Bench of three Hon'ble Judges of the Supreme Court, while emphasising that in a taxing statute a greater degree of latitude in matters of classification is permissible, noted that in order to tax something it is not necessary to tax everything :
"It is well settled that the latitude for classification in a taxing statute is much greater; and in order to tax something it is not necessary to tax everything. These basic postulates have to be borne in mind while determining the constitutional validity of a taxing provision challenged on the ground of discrimination."
The same principle must apply a fortiori in regard to a provision for recovery or collection where it is not necessary for the legislature or for the administrative authority to bring in every conceivable transaction in order to sustain a provision for recovery of tax at source. A statutory provision and, for that matter a notification issued thereunder, does not cease to be valid nor would it suffer from the vice of arbitrariness, merely because it has not imposed a liability to deduct tax at source on other entities or transactions.
These principles are indeed well settled and we may at this stage refer to the decision of the Constitution Bench of the Supreme Court in Federation of Hotel & Restaurant Vs. Union of India & Ors.7 where it was held as follows :
"It is now well settled though taxing laws are net outside Article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal-policy legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous. In examining the allegations of a hostile, discriminatory treatment what is looked into is not its phraseology, but the real effect of its provisions. A legislature does not, as an old saying goes, have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, the law would not be discriminatory. Decisions of this Court on the matter have permitted the legislatures to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes."
Prior to the notification which was issued on 7 October 2013, an earlier notification was issued under section 34(1) of the VAT Act on 4 March 2008 under which a liability to deduct tax at source was imposed on every person responsible for making payment to a contractor in discharge of a liability under a works contract. The categories of works contracts covered by the notification included transactions between a contractor and several other entities including a University, educational institution and training centre. The validity of that notification was upheld by the Division Bench of this Court in M/s. Satnam Engineers and Fabricators (P) Ltd. Vs. State of U.P. & Ors.8 .
The decision of the Division Bench was sought to be distinguished on behalf of the petitioners on the ground that : (i) the vires of section 34 of the VAT Act was not in question in that case; and (ii) the notification also applied to transactions between a contractor and a whole range of other private entities including companies, co-operative societies, firms and associations of persons. In our view, the fact that the present notification which is under challenge in these proceedings has a more restricted ambit would not affect the constitutional validity of the notification, once the fundamental principle of law is borne in mind that it is not necessary for the legislature while enacting a machinery or collection provision to bring within its fold every conceivable transaction and it is open for the legislature to target such transactions where it considers that the potential for evasion of tax must be regulated or dealt with. Hence, when the legislation has conferred upon the State a discretion to issue a notification to bring within the purview of section 34(1) certain specific transactions where a liability to deduct tax at source would arise, it is not necessary for the State, in order to sustain the validity of its action, to impose such a liability on every transaction with every conceivable entity. The notification cannot also be read down as sought.
In this view of the matter and for the reasons which we have indicated, we are unable to accept the challenge either to the validity of the provisions of section 34(1) or to the validity of the notification dated 7 October 2013. The statutory provision, to recapitulate, is not a charging provision but a provision for collection and recovery of tax. The legislature was entitled, in the exercise of its law making power, to leave it open to the State to fasten a requirement of deducting tax at source in certain specified situations or transactions. Sufficient safeguards have been introduced particularly in sub-sections (2) to (6) of section 34, as noted earlier in the course of the judgment. The notification which has been issued on 7 October 2013 has not transgressed either the parameters set out in section 34(1) or the norms of Article 14. The challenge on the ground that there has been a violation of Article 14 must hence fail. For these reasons we find no merit in the petitions.
The petitions shall, accordingly, stand dismissed.
Order Date :- 08.09.2014 GS (Dr. D.Y. Chandrachud, C.J.) (Dilip Gupta, J.)