Supreme Court Holds Rule 3A(2) of Tripura Sales Tax Rules Valid, Allows Tax Deduction at Source

In a significant ruling, the Supreme Court has upheld the validity of Rule 3A(2) of the Tripura Sales Tax Rules, 1976, allowing for tax deduction at source (TDS) on the transfer of the right to use goods. The judgment, delivered by a bench comprising Justices M.R. Shah and Krishna Murari, declared that the rule is not ultra vires the Tripura Sales Tax Act, 1976. The court emphasized that Rule 3A(2) serves as a recovery mechanism and does not alter the liability or chargeability of tax. The ruling overturns the previous decision of the High Court, which had held the provision as ultra vires and quashed the memorandum requiring TDS.

The court clarified the interpretation of the relevant provisions of the Tripura Sales Tax Act. It stated that every transfer of the right to use goods, including vehicles, is deemed to be a sale under the Act. Therefore, the liability to pay tax at a rate of 4% on such transfers rests with the transferor, who can be considered a dealer under the Act. The court rejected the argument put forth by the suppliers that they were not registered with the Tripura Sales Tax Act and thus not liable to pay tax.

Regarding the challenge to Rule 3A(2), the court noted that the rule was framed under Section 44 of the Act, which provides the rule-making power. It opined that the rule falls within the scope of the Act and does not exceed the legislative authority. Rule 3A(2) serves as a mechanism for recovery of tax from the buyer, who deducts and deposits the tax with the revenue authorities. The court held that the provision does not alter the chargeability or liability to pay tax, and thus, the High Court erred in declaring it ultra vires.

Justice M.R. Shah, delivering the judgment, stated, "Rule 3A(2) is not ultra vires the Tripura Sales Tax Act. It is a recovery mechanism and does not change the chargeability or liability to pay tax. The provision for tax deduction at source does not go beyond the provisions of the Act and Rules." The court further emphasized that Rule 3A(2) merely establishes the procedure for recovering the tax payable by the transferor/supplier from the buyer.

It affirms the legal validity of tax deduction at source on the transfer of the right to use goods, providing clarity and ensuring the proper collection of taxes. The decision brings certainty and upholds the legislative intent behind the Tripura Sales Tax Act.

Date of Decision: March 24, 2023

THE STATE OF TRIPURA & ANR. VS CHANDAN DEB & ORS.