Deferred Payment Of Works Contract In 'Recovery Mode' Doesn't Exempt Dealer From Levy Under Commercial Tax Act And Entry Tax Act: Madhya Pradesh HC
The Madhya Pradesh High Court has held that merely because payment is deferred by the State in terms of the works contract, the same cannot be grounds for a dealer to seek exemption from payment of taxes under the MP Commercial Tax Act, 1994 and MP Entry Tax Act, 1976.
In the case at hand, the Petitioner-company had entered into Build, Operate and Transfer (BOT) contract with the government for development of a by-pass road. As per the agreement, no explicit consideration was to be paid by the State but, the dealer was permitted to recover toll for next 10 years, following which the road would be transferred to the State Government.
Since the dealer failed to pay taxes purportedly arising from this arrangement, the Assistant Commissioner of Commercial Tax raised demands of Rs.46,87,141 under MP Commercial Tax Act and Rs.5,14,424 under MP Entry Tax Act. The demand was also upheld by the Revisional Authority under the Act, leading to filing of this petition.
Petitioner submitted that in a normal works contract, the Government pays contract money to the contractor for construction and after completion, the civil work is transferred to the State. Therefore, in a normal works contract, the contractor being a dealer is liable to pay the commercial tax as well as entry tax on the goods consumed in the construction work.
Petitioner further submitted that the present case was different, and falls under the new BOT scheme whereby the Government does not pay construction cost; the contractor himself arranges finances and construct and maintain the same for concessional period and thereafter transfer the civil work to the State Government. It contended that since there is no element of “sale” in BOT, therefore, it is not liable to pay taxes on the material under the Entry Tax Act as well as under the Commercial Tax Act.
It submitted that the nature of work executed by it was not in the nature of “works contract” since (i) no sale of goods was effected in constructing the by-pass road, and (ii) there is no payment of sale consideration by the State of MP.
Petitioner relied on Commissioner of Wealth Tax v. Ellis Bridge Gymkhana and others (1998) where the Apex Court held that a charging section has to be construed strictly and if a person has not been brought within the ambit of charging taxes, he cannot be taxed at all.
The Commerical Tax Department on the other hand submitted that (i) the petitioner is a dealer under Section 2(h) of the Commercial Tax Act, (ii) the petitioner under the BOT system was given the right to recover toll, to recover the sale amount of the items purchased for construction of the road, and (iii) ultimately the by-pass road was to be transferred to the State government.
It therefore contended that Petitioner had executed the works contract on State Government's land and consideration for the same was included in the toll tax amount to be retained by the Petitioner for 10 years.
It relied on Viva Highways v. MP Road Development Authority, (2017) where a Full Bench of the High Court held that the work done under the concession agreement is a works contract irrespective of its nomenclature (in this case BOT).
The High Court bench of Justices Vivek Rusia and Binod Kumar Dwiwedi agreed with the State and observed that all elements of sale are fulfilled to attract tax liability.
It noted that the period of 10 years was calculated after considering the total cost of construction of the project and its recovery by way of collection of toll. After the expiry of the said period, the petitioner shall not have any claim on the road as well as on a toll.
“It is a settled law that no person has a right to collect a toll or any tax from private persons for using the road. The State Government gave a right to collect the toll to the petitioner from the vehicle passing through the road for a definite period to recover the only cost of construction i.e. the sale amount or the contract value, therefore, the Dy. Advocate General for the State has rightly contended that in this case, the contract amount or sale price is liable to be made to the contractor as a deferred payment by authorizing him to recover the toll tax and except this, there is no difference in the work done under the BOT scheme and in the normal works contract,” it held.
Even otherwise, the Court noted from terms of the works contract, that the Governor's right was absolutely reserved to take over the facility at any time after completion of the work even during the concession period and in such circumstances, the dealer shall be eligible for compensation for the unrecovered amount along with the interest.
In light of the above discussion, the Court dismissed the petition and ordered recovery under Commercial Tax Act as well as the Entry Tax Act from the Petitioner.
Appearance: Senior Advocate PM Choudhary with Advocate Anand Prabhawalkar for petitioner; Dy. Advocate General Sudeep Bhargava for State.
Case title: Ashoka Infroways P.Ltd. v. State Of M.P. & Ors. And Others
Case no.: WRIT PETITION No. 2883 of 2008