A.K Ganguly, C.J:— Both these writ petitions were heard together as common questions of fact and law are involved.
2. The petitioner is a company incorporated under the provisions of the Companies Act, 1956 and is engaged in the business of constructing/executing road works throughout India and also in various other countries of the world. The petitioner is a registered dealer under the Orissa Sales Tax Act, 1947 as a “works contractor” under the Sales Tax Officer, Bhadrak Circle, Bhadrak. The petitioner secured the contracts for road construction in the State of Orissa, which were awarded by the National Highway Authority of India, Ministry of Surface Transport New Delhi/for a price of Rs. 310.94 crores and Rs. 257.93 crores (inclusive of all rates and taxes). These two contracts are the subject-matter of W.P (C) No. 94 of 2007 and W.P (C) No. 2774 of 2007. The petitioner's case is that in order to execute the works “contract, the petitioner has given a portion of the work relating to construction of road to various sub-contractors and according to the petitioner most of these sub-contractors are registered dealers under the Orissa Sales Tax Act. The sub-contractors are required to procure and effect transfer of property in goods which obliges them to seek registration and to pay taxes under the Act, independent of the liability of the petitioner. The petitioner in its term has effected IDS against payment made to the above sub-contractors and deposited the tax deducted at a source with the Government Treasury and issued the necessary certificates to the sub-contractors.
3. The further case of the petitioner is that in response to notices dated March 3, 2006 and April- 29, 2006, purported to have been issued under section 12(4) of the OST Act, it furnished books of account, contract copy, transaction documents/bills/vouchers, various statement of Turnovers, details of registered sub-contractors and details of tax deducted at source with the appropriate authority.
4. For the purpose of clarity, relevant facts pertaining to the aforesaid cases are noted herein below:
W.P (C.) No. 94 of 2007 (A.Y 2004-05):
Petitioner's return/Claim
Order of assessment
Gross turnover:
Rs. 72,20,57,901.00
Same
Exempted turnover:
Labour and service charges:
Rs. 31,36,86,623.06
Rs. 31,94,66,886.00
Payment to sub-contractors:
Rs. 27,15,49,324.00
Total
Rs. 58,52,35,947.06
Taxable turnover:
Rs. 12,06,19,386.00
Rs. 40,25,91,014.42
W.P (C.)No. 2774 of 2007:
Petitioner's return/Claim
Order of assessment
Gross turnover:
Rs. 60,99,03,766.00
Same.
Exempted turnover:
Labour and service charges:
Rs. 24,41,65,498.00
Rs. 39,25,40,559.00
Payment to sub-contractors:
Rs. 20,96,45,308.00
Total
Rs. 45,38,10,806.00
Taxable turnover:
Rs. 6,41,80,809.00
Rs. 21,73,63,206.00
5. The aforesaid computation was arrived at by the assessing officer by rejecting the claim of the petitioner-company for exemption of turnover both, towards labour and service charges as well as towards payment made to the sub-contractors.
6. From the facts which have been disclosed above, it is clear that the main attack is against the assessment order. Normally assessment order cannot be challenged by filing a writ petition in view of clear statutory remedy. But in the instant case, challenge has been made in both the writ petitions to the vires of section 5(2)(AA)(i) of the Orissa Sales Tax Act, 1947. section 5(2)(AA)(i) is as follows:
“(AA) Notwithstanding anything contained in sub-section (2)(A) ‘taxable turnover’ in respect of,—
(i) ‘work contract’ shall be deemed to be the gross value received or receivable by a dealer for carrying out such contract, less the amount of labour charges and service charges incurred for the execution of this contract.”
7. However, learned counsel for the petitioner in course of his argument did not press the aforesaid point about vires of the section. But the learned counsel has challenged validity of two circulars namely, Circular No. VIII (i)6/99-16715.CT dated July 30, 1999 and also circular No. III(1)/94/98- 2935.CT dated February 9, 2001 issued by the Commissioner of Commercial Taxes. By raising the question of legality to those two circulars, the learned counsel urged that since those two circulars have been issued by the Commissioner of Commercial Taxes, Orissa, the assessing officer and statutory appellate authority as well are bound by those circulars. There fore, no purpose would be served by filing an appeal since the matter is bound to be impacted by those circulars which are bad in law. In the said circular a blanket direction is given to the assessing officer to scrupulously follow the said guidelines. The other circular dated February 9, 2001 is also issued by the Commissioner of Commercial Taxes. The said circular was about grant of no deduction certificate to the contractor. The text of those two circulars are set out hereinbelow:
First Circular:
“Office of the Commissioner of Commercial Taxes: Orissa: Cuttack.
No. VIII(i) 6/99-16715.CT.Dated 30.7.1999
Circular
Sub:
Guidelines, of the Works. Department, Circular No. FA-.11-33/86-10273.W., dated 7-4-1986 while dealing with the works contractor cases.
Vide Works-Department Circular No. 10273.W dated April 7, 1986 for (a) structural; works (b) earth works, canal works, embankment works, etc./(c) bridge works; (d) road works, (e) building works, the percentages of labour charges have been fixed at 30 per cent, 60 per cent, 30 per cent,;40 per cent and 30 per cent, respectively It has come to the notice of the undersigned that most of the assessing officers and appellate officers are not following the guidelines issued by the Works Department/as a result of which in some cases audit is reporting cases of under-assessment. If detailed accounts for labour engaged and other expenses are not maintained as per provisions of the OST Act then these criteria be adopted while assessing works contract cases. Where proper, books of account are maintained deduction towards labour charges at a rate other than that prescribed by the Works Department maybe considered for reasons to be recorded in the order passed.
These guidelines should be scrupulously followed by the assessing officers and appellate officers while dealing in works contractors' case.
Copy of the Works Department Circular No; 10273.W. dated April 7, 1986 is again enclosed herewith for guidance.
Commissioner of Commercial Taxes,
Orissa, Cuttack.”
Second Circular:
“Office of the Commissioner of Commercial Taxes: Orissa: Cuttack.”
No. III(1)94/98-2935.CT.Dated 9.2.2001
Sub:
Grant of no deduction certificate to the contractor under section 13AA(5) of the OST Act, 1947.
Major project works are often awarded to a principal contractor, who in turn segmentise the same and engages sub-contractors/sometimes for the entire work on back-to-back basis. At time the sub-contractors further dissect their segment into portions and engage specialist executants for different portions. At the time of assessment in connection with such major projects, no uniform pattern is followed across the State. Sometimes, the sub-contractor or the execution agent is assessed leaving out the principal contractor. This is not legally correct as indicated in the paragraph 5 of the Circular No: 599.CT. dated January 9, 2001. As per the circular the principal contractor is liable to works contract tax as per the ratio in a number of judicial decisions.
2. In this context, it has come to the notice of the undersigned that the main contractor sometimes asks for TDS no deduction certificate under the plea that the work has been assigned to the sub-contractors entire and such certificate is granted. Sometimes the subcontractor also asks for such certificate with the submission that it is the main contractor who is liable for TDS and the prayer is also entertained. The department's response in this matter varies from circle to circle and seven at times from ward to ward. It is desirable that in this matter; a uniform pattern is followed, so that there would be no room for grievance or discrimination on duplication of work.
3. It has to be borne in mind that it is the main contractor who is legally supposed to execute the work for the contractee. The sub contractors and the specialist executants are in fact agents of the main contractor to carry on the project work and they are not to be assessed. It is the principal contractor, who, being liable under the OST Act should always be assessed and from whose payments tax is to be deducted at source under section 13AA. Similarly TDS, if deducted from sub-contractors for the same work ultimately, has to be refunded as TDS deduction has to be made from the principal contractor under law.
4. It should therefore be ensured that TDS is deducted from the main contractor's dues. Similarly TDS no deduction certificate as per law may be granted in favour of sub-cohfractor/executirig agents, if applied for. While considering no deduction certificate as contemplated under section 13AA(5) of the OST Act, 1947 and rule 37D of the Orissa Sales Tax Rules, 1947 when applied by the principal contractors, the Sales Tax Officer should not allow any deduction of the amount paid or payable to sub-contractors from the contractor value of the main contractors except when such payments is deductible as per the ratio of the decision in Gannon Dunkerley & Co. v. State of Rajasthan, [1993] 88 STC 204 (SC).
5. The Sales Tax Officers must review the position in this regard and if by mistake TDS no deduction certificate has been issued to any of the principal contractors, the same should be sent to the head office immediately for suo motu revision along with the particulars of status of sub-contractors, if available. This should be done by March 15, 2001 positively.
Sd/- G.C Pati
Commissioner of Commercial Taxes,
Orissa, Cuttack.”
8. Learned counsel for the petitioner submitted that the aforesaid circulars have no statutory basis, nor have these circulars been issued on the basis of any statutory rule or any section of the Act and these circulars are in the nature of administrative instructions.
9. Learned counsel for the petitioner submitted that the impugned order of assessment has been made on the basis/relying upon those circulars and therefore such assessment is ultra vires the statutory provision. Learned counsel submitted that in the matters of assessment in connection with “works contract”, sufficient guidelines have been; given by the honourable Supreme Court in the case of Gannon Dunkerley & Co. v. State of Rajasthan reported in [1993] 88 STC 204 and also in the judgment of the Supreme Court in the case of Builders Association of India v. Union of India reported in [1989] 73 STC 370, and that these circulars are in contravention of these judgments.
10. Relying on the decision in the case of Gannon Dunkerley, [1993] 88 STC 204 (SC), learned counsel for the petitioner submitted that at page 234 of the report it was clearly stated that the amounts which are to be deductible from the value of the goods involved in works contract have to be determined in the light of facts of each particular case and on the basis of materials produced by the contractor. In the said judgment, it has been made clear that the mode of determination of such value has been made clear by giving the following guidelines (at pages 234 and 235).
“….. The value, of the goods involved in the execution of a works contract will, therefore, have to be determined by taking into account the value of the entire works contract and deducting therefrom the charges towards labour and services which would cover:
(a) labour charges for execution of the works;
(b) amount paid to a sub-contractor for labour and services;
(c) charges for planning, designing and architect's fees;
(d) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract.
(e) cost of consumables such as water, electricity, fuel, etc., used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract;
(f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services;
(g) other similar expenses relatable to supply of labour and services;
(h) profit earned by the contractor to the extent it is relatable to supply of labour and services.”
11. In the said case of Gannon Dunkerley, [1993] 88 STC 204 (SC), it has been further held as follows (at page 238);
“To deal with cases where the contractor does not maintain proper accounts or the account books produced by him are not found worthy of credence by the assessing authority, the Legislature may prescribe a formula for deduction of cost of labour and services on the basis of a percentage of the value of the works contract but while doing so it has to be ensured that the amount deductible under such formula does not differ appreciably from the expenses for labour and services that would be incurred in normal circumstances in respect of that particular type of works contract. It would be permissible for the Legislature to prescribe varying scales for deduction on account of cost of labour and services for various types of works contract.
While fixing the rate of tax it is permissible to fix a uniform rate of tax for the various goods involved in the execution of a works contract which rate may be different from the rates of tax fixed in respect of sales or purchase of those goods as a separate article.”
12. Learned counsel submitted that the Supreme Court has clearly laid down that the formula for deduction of cost and services (in the absence of books of account) has to be provided by the Legislature: In other words, it is a legislative obligation to provide the necessary guideline by legislating the basis on which taxes (in such cases) may be ascertained. Learned counsel submitted that in the instant case there is no statutory basis. The entire question is left to the vagaries of the assessing authorities, who are exercising their discretion on the basis of circulars which are issued from time to, time and that too without any authority of law: Learned counsel submitted that though under section. 5(2)(B) it has been provided that for the purpose of ascertaining the deduction under sub-section meaning section 5(2)(AA) guidelines should be provided in the prescribed manner, but no rules have yet been framed under the said Act. Therefore, the man date of the Supreme Court in the case of Gannon Dunkerley, [1993] 88 STC 204 has not been followed and the assessment is sought to be carried out in a manner which is not the mandate of the Supreme Court. Learned counsel submitted that if the “measure of tax” is not provided either under the Act or under the Rules, the levy itself becomes “uncertain” and such uncertainty proves fatal to the validity of the taxing statute. Reference in this connection may be made to the decision of the Supreme Court in the case of Govind Saran Ganga Saran v. Commissioner of Sales Tax reported in [1985] 60 STC 1. At page 4 of the report, the learned judges have laid down various components which must constitute the concept of tax. The words of learned judges are as follows:
“….. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed; and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of he levy will be fatal to its validity.”
13. Under the said Act, the word “prescribed” has been defined under section 2(e) to mean as follows:
“(e) ‘prescribed’ means prescribed by rules made under this Act.” Under the Act, Rules have been made under section 29. Under the said rule-making-power there are provisions in section 29(2)(e) to the following effect:
“(e) the other sales or purchases, turnover in respect of which may be deducted from a dealer's gross turnover in computing his taxable turnover as defined in section 5;”
14. It is clear from the aforesaid statutory prescription that the Rules are contemplated under the said Act for the purpose of ascertaining deduction in the case of taxable turnover in respect of works contract. It is therefore clear that the provision should be there in the Rules. Without enacting any Rules for such purpose, the matter relating to deduction from the taxable turnover of works contract is sought to be done on the basis of aforesaid circulars. A similar situation arose before the Patna High Court in the case of Larsen & Toubro Ltd. v. State of Bihar reported in [2004] 134 STC 354. In that case also it was provided in clause (a)(i) of section 21(1) of the Bihar Finance Act, 1981 that for deductions from dealer's gross turnover, in order to arrive at his taxable turnover, deductions are to be given in respect of works contract of the amount of labour and any other charges and it was provided that the said deductions are to be given in the manner and to the extent prescribed. Similarly the word “prescribed” was defined as prescribed by Rules made under the Act. Similar is the position under section 2(e) in the said Act as quoted hereinabove. While construing those provisions, the Patna High Court held in paragraph 30 at page 375 of the report that in such situations the State is required to prescribe the manner and extent of deduction of the amount by statutory rule. The learned judges held:
“… If that is not done then the provisions become unworkable…”
15. The court held that the right of the State to recover the tax remains in tact, but in the absence of a workable provision it would not be possible for the State to assess the same. In paragraph 31 at page 375 of the report the following conclusions have been made:
“31. In our considered opinion sub-clause (i) of clause (a) of section 21(1) read with rule 13A of the Rules did not make sub-clause (1) fully workable because the manner and extent of deduction relating to any other charges has not been provided/prescribed by the State.”
16. Similar view has been taken by the Madras High Court in the case of Larsen and Toubro Limited v. State of Tamil Nadu reported in [1993] 88 STC 289. The learned judges held that in the absence of sufficient provision either in the Act or in the Ruies for properly determining turnover on which alone the tax can be levied and collected, section 3B remains dormant, but the same cannot be struck down. It was made clear that with the prescription of proper rules, section 3B can always be activated and enforced. As such the State was given liberty to levy, enforce and effect under section 3B relying on the principles laid down by the Supreme Court in the case of Gannon Dunkerley & Co. v. State of Rajasthdn reported in [1993] 88 STC 204 and in the case of Builders' Association of India v. State of Karnataka reported in [1993] 88 STC 248 (SC).
17. In the case of Voltas Limited v. State of Jharkhand reported in [2007] 5 VST 492; [2006] 3 JCR 518 (Jharkh), the Jharkhand High Court has also taken a similar view. It appears that the decision of the Jharkhand High Court was challenged before the honourable Supreme Court. The honourable Supreme Court refused to interfere with the judgment of the Jharkhand High Court. The decision of the Supreme Court is reported in State of Jharkhand v. Voltas Ltd., [2007] 7 VST 317. The Supreme Court in the said case has approved the observation of the Patna High Court in the case of Larsen & Toubro Ltd. v. State of Bihar, [2004] 134 STC 354 where the Patna High Court has held that if the manner of deductions are not provided under the Rules, the Act does not become workable.
18. Learned counsel for the Revenue did not dispute that the necessary Rules have not been framed pursuant to the Act but an objection was taken on the ground of alternative remedy. This court is of the opinion that if the Act is unworkable in the absence of necessary Rules, as has been held by several judgments referred to above, any assessment under the said Act cannot be enforced even if such an assessment order is made by an authority under the Act purportedly in accordance with the provisions of the Act. The inherent infirmity of an assessment order passed on the basis of circulars which have no statutory sanction cannot be cured by an appellate order. In other words, if the assessment order itself is not sustainable on account of unworkability of the provisions under which they are purportedly made, no purpose would be served by filing appeal against the said order and this question cannot be decided by the appellate authority under the Act in the instant case, both the assessing officer and the appellate authority are bound to follow the instructions contained in the circulars. Therefore, no purpose would be served by filing appeal before the appellate authority.
19. Learned counsel for the Revenue relied on a Division Bench decision of this court in the case of Bharat Heavy Electricals Ltd. v. Union of India reported in [1988] 71 STC 25. In the said judgment section 5(2)(AA)(i) was upheld by the Division Bench of this High Court. But it appears that the judgment of the Supreme Court in the case of Gannon Dunkerley, [1993] 88 STC 204 (SC) was rendered later, i.e, on November 17, 1992 whereas the decision in Bharat Heavy Electricals Ltd. v. Union of India, [1988] 71 STC 25 was rendered on May 12, 1988. After the decision in the case of Gannon Dunkerley, [1993] 88 STC 204 (SC), the entire law on works contract has undergone a change and it is the governing judgment in the case of works contract. The law laid down in Gannon Dunkerley, [1993] 88 STC 204 (SC) by the Supreme Court is binding on all courts in India. This is the mandate of article 141 of the Constitution.
20. For the reasons aforesaid, this court is of the opinion that the circulars which have been impugned in this case and which have been noted hereinabove cannot be treated to be a valid basis for assessment. In order to constitute valid basis for taxation, the rate of deduction specially a flat rate of deduction cannot be applied to calculate the taxable turnover in works contract. So those circulars cannot hold the field. As stated in the judgments referred to above, in the absence of any statutory basis for calculation of taxable turnover, the Act remains unworkable. Such gap in the statute cannot be filled up by the circulars which are purely ad hoc and administrative in nature and specially so when it relates to taxing law. It is a well-settled principle that in matters of taxation either the statute or the Rules framed under the statute must cover the entire field. Taxation by way of administrative instructions which are not backed by any authority of law is unreasonable and is contrary to article 265 of/the Constitution of India. Therefore; the impugned circulars are set aside as also the impugned orders of assessment. The assessee's liability to pay tax remains but in order to, assess that the State has to act in accordance with the statutory prescription by framing Rules under its rule-making power under section 29 of the Act and the assessing authority can pass fresh orders of assessment on the basis of such statutory Rules.
21. Both the writ petitions succeed to the extent indicated above, but without any order as to costs.
I. Mahanty, J.:— I agree