The fact that the contractor could seek refund of the tax paid did not absolve the contractee of their statutory obligation to deduct and pay TDS on Works contract
Krishnapatnam Port Company Ltd.(the Petitioner or KPCL) was engaged in the business of construction and development of the Krishnapatnam Deep Water Port in Nellore District, and in providing necessary infrastructural facilities for handling port operations thereat. By virtue of State concession contract dated September 17, 2004 (the Agreement), the Petitioner was granted construction and infrastructure activities of the Port for, and on behalf of, the State of Andhra Pradesh. In terms of the Agreement, the relationship between the State of Andhra Pradesh and KPCL was that of a principal and an agent. Further, Clause 3.16 of the Agreement specifically provided exemption from Sales Tax (VAT from 2005 onwards) on all Inputs and sales, if any, deemed. Further, Sales tax was totally exempt on all Inputs, required for construction of the Port, for the purpose of the project construction throughout.
KPCL entrusted the work of the Port construction to its holding company Navayuga Engineering Company Limited (NECL) on engineering, procurement and construction (EPC) basis for an agreed amount. The Department alleged that KPCL had deducted tax at source (TDS) from the bills of NECL but has not paid the same to the Government and accordingly confirmed demand of TDS of Rs. 92,98,03,154/- along with interest in terms of Section 22(2) read with Section 22(4) of the Andhra Pradesh Value Added Tax Act, 2005 (“AP VAT Act”).
Being aggrieved, the Petitioner filed a Writ Petition before the Hon’ble High Court of Andhra Pradesh submitting that by virtue of the conditions in the Agreement, the Government of Andhra Pradesh undertook to forego revenue streams from the project, such as exemption from Sales tax on all the Inputs required for project construction and that the KPCL had not recovered any tax from the Contractor which can be verified from the records and the running account bills.
The Hon’ble High Court of Andhra Pradesh held as under:
- NECL was liable to pay tax under the AP VAT Act for execution of the Works contract of construction of the Port. Further, KPCL was statutorily obligated, under Section 22(3) of the AP VAT Act, to deduct TDS from the running account bills of NECL, and remit the deducted tax amount to the Government;
- The fact that NECL could seek refund of the tax paid as per the State Government Order G.O.Ms. No. 609 dated May 29, 2006, issued in terms of Section 15(1) of the AP VAT Act, will not absolve KPCL of their statutory obligation to deduct TDS;
- Section 15(1) of the AP VAT Act merely enables the State Government, if it is necessary to do so in the public interest, to provide by way of Notification, for grant of refund of the tax paid to any person on the purchases effected by him and specified in the said Notification. Even on a notification being issued under Section 15(1) of the AP VAT Act, the contractee is statutorily obligated, under Section 22(3) thereof, to deduct TDS from the running account bills of the contractor, and the contractor is entitled, thereafter, to claim refund;
- Hence, if a statute has conferred a power to do an act, and has laid down the method in which that power has to be exercised, it necessarily prohibits the doing of the act in any manner other than the one prescribed;
- The AP VAT Act does not empower the Government to grant exemption but only enables it to grant refund, the doctrine of promissory estoppel cannot be invoked to compel the Government of Andhra Pradesh to carry out a promise contrary to the provisions of the AP VAT Act;
- The Petitioner suppressed the fact that KPCL having deducted tax at source from the running account bills of NECL, have made false statements on oath before the Court that there is no deduction of TDS from NECL. Further, KPCL by resorting to such dishonest means, secured interim stay of all further proceedings and have thereby avoided remitting the TDS deducted from the running account bills of NECL, to the Government. The undeserved benefit and advantage obtained by KPCL, by abusing the judicial process, must be neutralized;
- The Petitioner abused the process of the Court by making a false statements on oath, hence is liable to pay exemplary costs of Rs. 75,000/- to the Commissioner, Commercial Taxes within three weeks from the date of receipt of a copy of the Order of the Court, failing which the Commissioner can recover the same in accordance with law.
The Hon’ble High Court dismissed the appeal in favour of the Department and held that the fact NECL could seek refund of the tax paid did not absolve KPCL of their statutory obligation to deduct TDS on Works contract.