Contractors Can't Be Made To Pay Past TDS Shortfall By Contracting Authority: Punjab & Haryana High Court

The Punjab and Haryana High Court recently held that Rail Coach Factory (RCF) cannot recover differential tax deducted at source (TDS) from contractors for past periods once the contractors' VAT liability has already been assessed and paid.

A Bench of Justice Jagmohan Bansal and Justice Amarinder Singh Grewal was hearing writ petitions filed by G.S. Builders, Inderjit Bajaj and R. Tech Builders. The contractors had challenged recovery notices issued by RCF seeking to deduct additional amounts from their running and final bills.

The Court said the purpose of TDS is only to secure payment of tax. It cannot be used to recover amounts after the tax liability has already been discharged.

“The object of deduction of tax at source is to ensure and secure payment of tax. The total tax liability which finally had to accrue has already been deposited by petitioner, thus, there is no revenue loss,” the bench held.

The petitioners were engaged in construction contracts awarded by RCF. Their work attracted TDS under Section 27 of the Punjab VAT Act, 2005. At the relevant time, tax was required to be deducted at 2 percent.

On 9 January 2008, the state government issued a notification enhancing the TDS rate to 4 percent. RCF, unaware of the revised rate, continued deducting tax at 2 percent until 6 October 2009.

The Excise and Taxation Department later informed RCF that the deduction should have been made at 4 percent with effect from 9 January 2008. RCF then issued recovery notices proposing to recover the differential amount from contractors' bills. In one case, the amount sought was Rs. 10.70 lakh.

The contractors told the court that they had filed quarterly and annual VAT returns. They had disclosed their full tax liability. The returns had been assessed, and the tax had been paid.

They argued that if RCF had deducted tax at 4 percent, they would have claimed corresponding credit. Since the tax liability was already discharged, recovery of the shortfall from them was impermissible.

The High Court accepted the submissions. It noted that the contractors were regular taxpayers and not exempt assessees. Their tax liability had already been assessed and paid.

The court held that the failure to deduct tax at the enhanced rate was attributable to RCF and not to the contractors. It observed that non-deduction at source had only delayed the receipt of revenue.

“The petitioner was liable to pay tax on monthly basis, thus, delay in receipt of tax by State Government must be of few days,” the Bench noted.

The Court clarified that any interest arising from the gap between the due date of deduction and the date of actual payment could be recovered only from the person liable under law. It found no mala fide intent and described the lapse as a procedural failure by RCF, a public sector undertaking.

“RCF was not required to make deduction of differential amount of tax, i.e., tax already deducted and tax required to be deducted from the running bill of the petitioner(s),” the Bench held.

Accordingly, the High Court quashed the recovery action initiated by RCF. It restrained RCF from recovering the differential TDS from the contractors' running or final bills. It granted the Excise and Taxation Department liberty to compute and recover interest, if any, in accordance with law.

For Petitioner: Advocates, Anurag Chopra, Vardaan Seth, Himanshu Bindal

For Respondent: Additional A.G. Punjab, Himanshu Bindal and Senior Pancel Counsel Pankaj Gupta for respondent no. 2 to 4