Cannot Collect Tax Twice: Telangana High Court Quashes TDS Demand On Contractee When Contractor Has Discharged Full Tax Liability

"The tax administration cannot be reduced to a mechanical exercise of raising demands without regard to material that squarely negates the very premise of the demand." Telangana High Court, in a significant ruling dated August 13, 2026, held that tax authorities cannot demand Tax Deducted at Source (TDS) from a contractee who failed to deduct it if the primary contractor has already discharged the entire underlying tax liability.

A division bench comprising Justice P. Sam Koshy and Justice Narsing Rao Nandikonda observed that compelling a deductor to remit TDS when the principal assessee has already paid the tax results in impermissible double taxation and reduces tax administration to an exercise that is wasteful and devoid of purpose.

The petitioner company, engaged in constructing a Five Star Hotel, had awarded a works contract to a registered contractor but inadvertently failed to deduct tax at source under Section 22 of the Andhra Pradesh Value Added Tax Act, 2005 on payments made between June 2007 and August 2009. Upon audit, the Commercial Tax Officer raised an impugned demand of Rs. 79,08,309/- under Section 22(3) of the APVAT Act. Aggrieved by the demand, especially after the contractor produced regular assessment orders proving full discharge of tax liability for the relevant period, the petitioner approached the High Court under Article 226 of the Constitution of India.

The primary question before the court was whether the Commercial Tax Officer could proceed to demand and recover TDS from the contractee under Section 22(3) of the APVAT Act, 2005 when the works contractor had already fully satisfied the tax liability for the underlying transactions.

TDS Is A Collection Mechanism, Not An Independent Tax Liability

Examining Section 22 of the APVAT Act, 2005 and Rule 18 of the APVAT Rules, 2005, the bench observed that statutory deduction of tax at source is essentially an advance recovery mechanism designed to ensure timely tax collection payable on works executed. The court clarified that statutory deduction at source does not create an independent or distinct tax liability beyond the contractor's substantive liability.

Under Rule 18(3) of the APVAT Rules, any amount deducted and remitted by a contractee operates strictly as a payment of tax on behalf of the contractor, who is entitled to credit upon submitting the required certificate. The court emphasized that when the principal assessee has already satisfied the liability in full, the statutory premise for demanding TDS ceases to exist.

Demanding TDS After Tax Payment Amounts To Double Taxation

The bench underscored that once the contractor produces proof of complete discharge of tax via VAT 200 returns and regular assessment orders in Form VAT 305, no outstanding liability remains against which TDS credit could be applied.

"Once the principal liability itself stands discharged, there remains no further tax due against which a TDS deduction could be credited. Nonetheless to compel the petitioner to deduct and remit the very same amount over again, would result in the State receiving tax twice over on one and the same works contract."

The bench noted that permitting such recovery would merely trigger a circular and pointless exercise where the Revenue collects tax twice only to refund the exact sum to the contractor at a later stage.

Parity With Section 201 Of The Income Tax Act

Drawing strong support from established jurisprudence under the Income Tax Act, 1961, the bench noted that Section 22 of the APVAT Act is in pari materia with Section 201 of the IT Act regarding the underlying scheme of tax deduction at source.

The court placed reliance on the decisions in CIT v. Divisional Manager, New India Assurance Co. Ltd. and CIT v. Manager, Madhya Pradesh State Co-operative Development Bank Ltd., which established that where regular assessment of the payee is complete and tax is fully paid, the assessing authority lacks jurisdiction to demand further tax from the person responsible for deduction.

The bench also adverted to CIT v. Rathi Gum Industries, reiterating that once the tax stands paid by the recipient, recovery of the tax component from the deductor is unjustified, leaving only potential interest liabilities which were not the subject matter of the present dispute.

Mechanical Exercise Of Demand Without Application Of Mind Deprecated

The High Court expressed strong concern over the commercial tax authority's refusal to consider the unrebutted documentary proof furnished by the petitioner and contractor prior to passing the final demand order.

The court held that where an assessee places on record clear and unrebutted proof that the tax has already been paid by the contractor, the taxing authority is legally bound to conduct a reasoned verification rather than mechanically issuing demands. The bench further noted that the impugned order suffered from an unverified arithmetical computation error of Rs. 57,71,577/- in calculating the gross contractual consideration.

The High Court allowed the writ petition and set aside the impugned demand order dated September 22, 2009, holding that the Revenue cannot exact tax twice over the same transaction. The ruling firmly reiterates that TDS recovery provisions cannot be weaponized mechanically once the substantive tax liability stands fully discharged by the principal taxpayer.

Date of Decision: 13 August 2026